The US Federal Reserve cannot "wave a magic wand" to fix the economy overnight, but it can provide "essential" support, a top Fed policymaker.
Indeed, support will likely be warranted unless economic conditions improve, William Dudley, president of the New York Fed and a permanent voter on the Fed's policy-setting panel, said in a speech at Cornell University.
His comments underline market expectations that the Fed will buy more long-term assets at its next policy-setting meeting on 2-3 November to try to revive the economic recovery.
The US central bank cut interest rates to near zero and bought $1.7 trillion in mortgage-related and Treasury debt to try to boost the economy during the global financial crisis.
However, a Fed colleague known for steady opposition to easy monetary polices said further easing would be a "dangerous gamble" that could set in motion another wrenching boom and bust cycle.
"There are real risks to quantitative easing," Kansas City Federal Reserve Bank President Thomas Hoenig said in Lawrence, Kansas, referring to extensive asset purchases by the Fed to push borrowing costs lower even though short-term rates are near zero.
Hoenig acknowledged he held a minority view on the Fed. He has used his voting status this year to dissent six times against Fed policies aimed at supporting the recovery.
Dudley, who has been among Fed officials making the case for monetary easing, said the road to full recovery is likely to be "long and bumpy." Momentum is slowing, he said.
"The Fed cannot wave a magic wand and make the problems remaining from the preceding period of excess vanish immediately," Dudley said. "But we can provide essential support for the needed adjustments."
Dudley repeated his view that high unemployment and low inflation were inconsistent with the Fed's mandate to maintain price stability and maximum employment.
"I said that I thought further Fed action was likely warranted unless the economic outlook were to evolve in a way that made me more confident we would see better outcomes for both employment and inflation before too long."
Hoenig, for his part, restated his belief that ultra low interest rates and a more than doubling of the Fed's balance sheet from pre-crisis levels risks creating asset bubbles and sets the stage for
City A.M. Reporter