William C Dudley: Prospects for the economy and monetary policy Speech by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the New York University’s Stern School of Business, New York, 28 February 2011. *  *  *  It is a pleasure to have the opportunity to speak here today. My remarks will focus primarily on two areas. First, what is the outlook for economic activity, employment and inflation? In particular, what are the areas of vulnerability that we should be most concerned about? Second, what does the outlook imply for monetary policy? As always, what I will say reflects my own views and opinions, not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System. In my talk, I’ll argue that the economic outlook has improved considerably. Despite this, we are still very far away from achieving our dual mandate of maximum sustainable employment and price stability. Faster progress toward these objectives would be very welcome and need not require an early change in the stance of monetary policy. However, I’ll also focus on some issues with respect to inflation that will merit careful monitoring. In particular, we need to keep a close watch on how households and businesses respond to commodity price pressures. The key issue here is whether the rise in commodity prices will unduly push up inflation expectations. Inflation expectations are well-anchored today and we intend to keep it that way.
In the early phase a significant part of this income came from liquidity programs. More recently, the main contributor has been net interest on the expanded SOMA portfolio. At this juncture, SOMA continues to generate abnormally high net income. As policy eventually normalizes and the cost of financing assets via interest on excess reserves goes up, the net interest margin on the SOMA assets will return to more normal levels. However, the net interest margin is unlikely to turn negative because roughly $ billion of assets are – and have been for many years – funded by notes and coins in circulation, on which the Fed does not pay interest.