The Federal Reserve has not yet decided whether to embark on a third round of quantitative easing, or QE3, though it remains an option, an influential Fed official said on Monday.
New York Fed President William Dudley, a close ally of Chairman Ben Bernanke, painted a mixed picture of the economy, tempering recent signs the recovery is gaining speed with warnings that it could just as easily stall out.
Nothing has been decided, he said of QE3, in which the Fed would make large-scale asset purchases in an attempt to lower rates and give the economy another controversial shot of adrenaline.
It all depends on how the economy evolves, Dudley added. It's about costs and benefits, and if we get to a point where we think the benefits of another program of QE outweigh the costs, then we'll certainly do so.
Dudley, like Bernanke in recent testimony to Congress, defended the central bank's ultra-easy policy stance but did not offer any guidance on what more the Fed was prepared to do to help the recovery and ratchet down the unemployment rate, which remains a high 8.3 percent.
Another Fed official said he believes it would do the economy no good for the central bank to ease further.
We have filled the tanks, there is plenty of liquidity. We need no more, Dallas Federal Reserve President Richard Fisher told a roundtable discussion at a business event in London.
Fisher, an outspoken policy hawk who has been critical of the Fed's last round of asset purchases, is not a voter on the central bank's policy-setting panel this year.
2013 OR 2014?
After a meeting in Washington last week, the Fed's policy-setting committee made no policy change and gave few clues on how it interpreted recent jobs growth, coupled as it has been with worries over GDP growth and oil price-driven inflation.
The committee did, however, restate its expectation to keep interest rates ultra-low through late 2014. Asked about that on Monday, Dudley said: They (rates) might increase sooner, they might increase later, depending on how the economy evolves.
If the economy were to change in a meaningful way then obviously we would change our forecast.
Economic reports in recent weeks have supported an upbeat view about the recovery, and many in financial markets have begun to lower expectations the Fed would have to take further steps to bolster growth.
After the Fed's January meeting, financial markets were pricing in a first rate hike by July 2014. Now - after reports showing employers added a total of 511,000 workers in January and February - they are pricing in a first rate hike by July 2013.
Benchmark yields were hovering near four-month highs on Monday as investors pared bond holdings on signs of a strengthening economy and some stabilization in Europe's debt troubles.
Dudley said economic activity is not yet strong or sustained enough to put a dent in the economy's slack, which is keeping many Americans out of work some three years after the deep recession ended.
The incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be finally establishing a somewhat firmer footing, Dudley said, citing expanding GDP late last year, payrolls, sales of motor vehicles, and somewhat firmer housing starts.
While these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods, Dudley, a policy dove with a permanent vote on the Fed's policy-setting committee, told a gathering of the Long Island Association before touring a nearby music products manufacturer, D'Addario & Co.
GASOLINE AND OTHER HEADWINDS
The central bank has kept interest rates near zero since late 2008 and bought $2.3 trillion in long-term securities to help revive the economy after the 2007-2009 recession.
Upbeat data so far this year has tempted some, including some Fed policymakers, to say the recovery is well under way and that the Fed will take no further steps.
Yet Bernanke and others have said more bond purchases remain an option. Last year, Dudley was among the most vocal about the efficacy of buying mortgage-based securities to help revive that sector of the economy.
Dudley warned that higher gasoline prices are definitely a risk to the world's largest economy, as they crimp consumers' ability to spend on other items. But he did not see higher pump prices fueling broader inflation.
The upward pressure on prices caused by rising gasoline are offset by downward pressure on prices caused by all the excess slack in the U.S. economy, he said. It's very hard to have an inflation problem when compensation costs are rising quite slowly.
The annual rate of core inflation, Dudley argued, has peaked and we expect it to begin to decline later this year. He added that inflation expectations remain well anchored.
Besides gas, other headwinds include impediments to the housing sector, fiscal drags at the federal and state levels, and risks that foreign growth is weaker than expected, Dudley said.
Bernanke, who along with Dudley spearheaded the Fed's unprecedented and easy policy steps, is set to deliver a public lecture on Tuesday.
(Additional reporting by Mark Felsenthal in Washington and Ana Nicolaci da Costa and Richard Hubbard in London; Editing by Andrea Ricci and Padraic Cassidy)