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Risks to growth remain, says chief of the New York Fed

William J. Dudley, president of the Federal Reserve Bank of New York, spoke last week at Rensselear Polytechnic Institute in Troy, New York, about the pace of the U.S. economic recovery.

Since the Great Recession, the U.S. has grown at a disappointing 2.2 percent annual rate, he said. However, economic forecasts for 2015 are positive because job openings have increased to a 14-year high, bank balance sheets have improved. He said that the headwinds from fiscal policy have diminished. This is consistent AIER’s recent analysis of fiscal policy that found that the federal budget deficit is less of a drag on GDP.

Despite the positive forecasts for 2015, Dudley said significant risks to growth remain. American demand for homes and durable goods may weaken. The fast pace of car sales, 17.4 million in the last three months, is not sustainable. Single-family housing construction remains weak, and only the most qualified borrowers are approved for mortgages. Dudley repeated that even former Fed Chair Ben Bernanke was turned down for a mortgage refinance.

On the international front, Dudley said, growth in Europe is slow and will remain so without structural reform as Mario Draghi, president of the European Central Bank has said repeatedly.

Dudley said that weak international growth, a strong dollar, and an increase in U.S. energy production are holding inflation under 2 percent. A strong dollar decreases the price of imported goods for U.S. consumers, but increases the price of U.S. exports. Combined with weak international economic growth, the strong dollar decreases demand for U.S. exports and reduces employment, wages, and ultimately inflation. Energy prices are yet a further restraint on inflation. Energy production in the U.S. has surpassed that of Saudi Arabia decreasing the price of gasoline and many other intermediate goods. Unfortunately, Dudley did not mention the higher food prices present at the grocery store. For more information on this see AIER’s latest Everyday Price Index.

Looking forward, despite an unprecedented amount of liquidity on banks’ balance sheets, inflation expectations remain firmly anchored at 2 percent. What does the economic and inflation outlook mean for monetary policy? Dudley stated that the Federal Reserve believes it will be appropriate to raise interest rates in mid-2015, but emphasized that, as always, the decision will be based on incoming economic data.

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