Fed's Dudley: More Easing Warranted

The dollar is falling against major currencies on Friday following Federal Reserve of New York President William Dudley's remarks that further quantitative easing may be warranted to boost the economy.
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NEW YORK (

TheStreet

) -- The dollar was falling against major currencies on Friday following Federal Reserve of New York President William Dudley's remarks that further quantitative easing may be warranted to boost the economy.

Speaking at a conference of business journalist, Dudley reiterated some of the concerns articulated by the Fed in its last policy statement. "Viewed through the lens of the Federal Reserve's dual mandate -- the pursuit of the highest level of employment consistent with price stability, the current situation is wholly unsatisfactory. Given the outlook that the upturn appears likely to strengthen only gradually, it will likely be several years before employment and inflation return to levels consistent with the Federal Reserve's dual mandate."

In its last policy statement, the Fed said for the first time that it considers inflation to be too low. While it does not have a number in mind, Dudley indicated that the Fed would be satisfied with a core rate of inflation of 1.75% to 2%. Low inflation, Dudley said, would not only slow nominal income growth but it would keep inflation expectations low, driving up real interest rates and the real cost of credit.

On Friday, the Commerce Department said core personal consumption expenditure, the Fed's preferred measure of inflation, rose 1.4%, same as in June and July, indicating inflation was stabilizing, but was still below the Fed's preferred range.

To counter the risks of low inflation, the Federal Reserve would actively communicate its goal "to return inflation to more normal levels" to keep inflation expectations anchored, Dudley said.

It might also consider using other tools such as purchasing medium and long-term treasuries or mortgage backed securities. Dudley estimated that $500 billion of purchases may be as much a stimulus as a reduction in the fund rate of between a half and three quarter of a point.

The dollar index was down 0.6% at 11.30 EDT. The 1-year treasury note was down by 1/32, strengthening the yield to 2.513%.

-- Written by Shanthi Venkataraman in New York.

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