MercoPress. South Atlantic News Agency

Fed New York calls for “fiscal house in order” without “derailing recovery”

William C Dudley said China has a big role to play also

Federal Reserve Bank of New York President William C. Dudley said the US must reduce the federal budget deficit without derailing the economic recovery. “No issue is more important than a credible commitment for getting our fiscal house in order, but at a pace that does not forestall a sustained recovery” said Dudley this week addressing the Foreign Policy Association in New York.

“If we do not act voluntarily and pre-emptively, the market will inevitably force the outcome later -- most likely in a much more difficult and messy fashion” warned Dudley who underlined that to sustain economic growth in the long term, the US must rebalance its economy away from consumer spending toward exports and investment.

However emerging market economies, particularly China, should allow their currencies to appreciate and alter their “growth strategies that rely on excessive consumption elsewhere,” he said.

China, the world’s second-largest economy, has relied on exports to drive economic growth. To keep its currency cheap and boost overseas sales, China accumulated 3.04 trillion of foreign-currency reserves as of March, up 24% over a year earlier.

“We would all be better off if the system evolved toward more flexible exchange rates and greater monetary independence” in emerging-market economies, Dudley said. “The current relationships in terms of capital flows and composition of growth are not likely to prove sustainable on a long-term basis.”

The U.S. economy’s recovery from the worst financial crisis since the Great Depression is “distinctly sub-par” despite “aggressive monetary and fiscal stimulus,” Dudley said.

China won’t be able to maintain annual export growth “in the high teens,” and its economy’s rapid growth threatens to result in “overheating,” he said.

Growth in countries such as China and India has been the “principal driver” in the surge in commodity prices in recent years, Dudley said.

The Fed top official said “Commodity prices will not continue to increase at the explosive rate of recent months” and “households and businesses will adjust their activities in response to higher prices, and there will be a supply response to higher prices that will gradually build over time”.