Fed's Dudley: QE may be prolonged if forecasts are off

William Dudley, president of the Federal Reserve Bank of New York, has reiterated the point that QE tapering could begin later this year (speech here).

In its statement, the FOMC said that it may vary the pace of purchases as economic conditions evolve. As Chairman Bernanke stated in his press conference following the FOMC meeting, if the economic data over the next year turn out to be broadly consistent with the outlooks that the FOMC sees as most likely, which are roughly similar to the outlook I have already laid out, the FOMC anticipates that it would be appropriate to begin to moderate the pace of purchases later this year.

(our emphasis)

However, Dudley added that "the policy—including the pace of asset purchases—depends on the outlook rather than the calendar". Thus, if labour market conditions and growth were less favourable than the FOMC outlook, QE could be prolonged.

And even when unemployment hits 6.5 per cent, he says, the FOMC could wait considerably longer before raising short-term rates". Most FOMC participants currently do not expect short-term rates to begin to rise until 2015.

In addition, Dudley adds that even if the pace of purchases were to be reduced on time, "it would still be the case that as long as the FOMC continues its asset purchases, it is adding monetary policy accommodation, not tightening monetary policy. As the FOMC adds to its stock of securities, this should continue to put downward pressure on longer-term interest rates, making monetary policy more accommodative."

Some investors took reassurance in the suggestion that a tighter monetary policy might not be coming soon, buoyed by encouraging US data on pending home sales.

Following Jerome Powell's input immediately after Dudley, economist Justin Wolfers summed up the Fed speeches following Bernanke's announcement so far: