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Fed's Dudley 'wouldn't rule out' QE cut this year: CNBC

William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York speaks at the Council on Foreign Relations
William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York speaks at the Council on Foreign Relations

By Jonathan Spicer

(Reuters) - An influential Federal Reserve policymaker said he "certainly wouldn't want to rule out" a reduction in the U.S. central bank's bond-buying program later this year, adding the Fed now expects slower economic growth than it did in June.

The decision "depends on the data," New York Fed President William Dudley said in a Monday interview aired on CNBC Tuesday. "The thing that we really want to emphasize is that it's driven by data, not by time."

Dudley, a close ally of Fed Chairman Ben Bernanke, repeated however that a plan that Bernanke articulated in June to wind down the quantitative easing (QE) program remained "intact." The plan was to reduce QE later this year and to end it by about mid-2014 as long as the economy keeps improving as expected.

The sometimes mixed messages from Fed officials in the last few days have left investors guessing. U.S. stock index futures were little changed early Tuesday.

Back in June, U.S. Treasury bond markets fell sharply when Bernanke unveiled the timeline for the year-old program in which the Fed buys $85 billion in Treasury and mortgage bonds each month to boost the slow U.S. economic recovery.

Investors and economists widely expected the Fed to reduce the pace of QE at a meeting last week, but policymakers decided to leave it unchanged, sparking a global rally in bonds and stocks. The Fed cited fiscal constraint and tight financial conditions, including in mortgages, in its shock decision.

Dudley said Bernanke's plan was based on the Fed's June economic forecasts; last week, the Fed lowered its expectations for 2013 and 2014 growth.

"So if the economy were behaving in line with the Fed's June forecast then it's certainly likely that the Fed would taper later this year," Dudley said. "But whether that's going to happen or not remains uncertain."

QUESTIONS LOOM

The latest round of quantitative easing was launched a year ago to encourage investment, hiring and growth.

Unemployment has dropped to 7.3 percent as of last month, from 8.1 percent a year ago, but gross domestic product growth remains below the 3 percent rate to which Americans are accustomed, causing hesitation at the Fed and confusion in the markets.

"There's conflicting reports on the internal discussion in the Fed," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh. "There's a lot of information and that makes the Fed look confused."

Asked whether the Fed was targeting specific levels of private-market interest rates before QE can be reduced, Dudley said: "Absolutely not." He noted that "the tightening of financial conditions was quite large" since May, and that played a role in leaving policy untouched last week.

Another concern is a debate in Washington, over the debt ceiling and government funding, that got underway this week and that could shut down the government.

"I'm not going to tell them how they should conduct fiscal policy," Dudley said. "But I think less drama, more certainty would be a very good thing."

Another question hanging over the Fed is the end of Bernanke's term at the end of January. Janet Yellen, the vice chair, is considered the front-runner now that former Treasury Secretary Lawrence Summers dropped out of contention this month.

"I would not see it as any large change in the monetary policy" under Yellen, Dudley predicted. "I think it would be very consistent with the monetary policy that we've had in the past."

On Monday, Reuters reported that President Barack Obama was unlikely to name Bernanke's successor this week.

(Additional reporting by Rodrigo Campos; Editing by Lisa Von Ahn and Chizu Nomiyama)

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