REFILE-WRAPUP 2-Dudley: Fed no magician, but can support economy

(Fixes spelling mistake in paragraph 16)

* Dudley says Fed can provide “essential” support

* Repeats more easing likely needed unless economy improves

* Hoenig – more easing could be dangerous gamble

* Volcker says inflation not a worry for years

By Kristina Cooke

ITHACA, N.Y., Oct 25 (BestGrowthStock) – The U.S. Federal Reserve
cannot “wave a magic wand” to fix the economy overnight, but it
can provide “essential” support, a top Fed policymaker said on
Monday.

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 Nov 2-3 to try to revive the economic recovery.

The U.S. 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.
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For all stories on likely Fed easing: [ID:nFEDAHEAD]

For a PDF on the G20’s uneasy truce on currencies and trade

imbalances: http://r.reuters.com/nan99p

For an interactive graphic on Fed hawks and doves:

http://r.reuters.com/ryv97p
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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 another crisis.

Although critics argue further support for the economy
could prove inflationary, a former Fed chairman known for his
inflation fighting commitment said inflation is unlikely to be
a problem for years. Paul Volcker added he does not see the
risk of a damaging spell of falling prices.

“Inflation is not a problem right now. It won’t be a
problem next year, it won’t be a problem for several years,”
said Volcker, who is now chairman of the Obama administration’s
Economic Recovery Board, in Boston.

“I see no possibility, frankly, that deflation will take
place,” he added.

Fed Chairman Ben Bernanke has said signs the weak recovery
could be at risk would appear to meet criteria for the Fed to
provide further aid, and the debate among most observers is
over the scope and pace of easing.

Dudley said whether an incremental approach to asset
purchases, or a big-bang approach, would work best would depend
on the economic context.

But he downplayed expectations for a November announcement
of a new round of quantitative easing — known as QE2.

“I would put very little weight on what is priced in or not
priced in to the market,” Dudley said in response to reporters’
questions. “With QE2 it is a careful assessment of the costs
and benefits and to try to judge whether it makes sense to do
it or not.”

The prospect of further Fed easing has drawn the ire of
emerging nations, who say its feeds a flood of capital into
their markets as investors seek out higher yields, potentially
destabilising their economies.

However, Dudley said the dollar was not an objective for
the U.S. central bank. If the Fed focused on its dual mandate
of full employment and price stability, “the dollar will take
care of itself,” he said.

Dudley repeated that the Fed is closely monitoring U.S.
foreclosures for their potential impact on housing and
financial markets and the broader economy.

State and federal officials are investigating allegations
that for years banks have not reviewed foreclosure documents
properly or have submitted false statements to evict delinquent
borrowers. [ID:nN11106777]

(Reporting by Kristina Cooke, Carey Gillam in Lawrence,
Kansas, Ros Krasny in New York; writing by Kristina Cooke and
Mark Felsenthal; editing by Chizu Nomiyama and Neil Fullick)

REFILE-WRAPUP 2-Dudley: Fed no magician, but can support economy