Yesterday I summarized Fed Vice Chair Janet Yellen’s comments about housing. Today New York Fed president William Dudley spoke in Brooklyn.
The bulk of his remarks covered regional issues, but he focused also on the national economy. Like Bernanke, Dudley thinks the current soft patch in the economy is transitory and that growth will pick up in the second half of the year, even if it remains subpar.
Dudley details several “downside risks”:
- As I mentioned earlier, high oil and commodity prices have further strained many families that already had tight budgets.
- The renewed decline in home prices could dampen consumer spending and housing activity more than I expect.
- The recent slowing of consumer spending growth could prompt businesses to limit hiring and investment.
- Finally, aggressive near-term government spending cuts or tax increases could slow economic growth at least in the short- to medium-term. I would emphasize, however, that a credible plan for long-term fiscal consolidation is sorely required and would have many economic benefits.
I’m going to add another pretty major downside risk: the unwinding of QE2, which has I suspect been more successful in buoying markets and credit than many believe. We’ve seen stocks decline for several weeks now, and I don’t see much reason that they shouldn’t continue trending down. (The market is obviously unpredictable, however.) Still it’s obviously a risk if the Dow declines through the summer and Americans reduce spending as a result.
In sum, more of the same from the Fed, which seems loathe to use other tools at their disposal to sustain the recovery.