The dollar sank to a nine-month low Friday after a top Fed official made the case for more monetary stimulus.
William Dudley, the president of the Federal Reserve Bank of New York and a voting member of the Federal Open Market Committee, said in a speech in New York that he believes “further action is likely to be warranted” unless economic activity promptly picks up.
Dudley said the current rates of unemployment, at 9.6%, and inflation, at 1.5%, are “unacceptable.” He said the Fed must take action to prevent overindebted households from taking another hit and further slowing the economy.
“To ensure that the more favorable trends in household balance sheets continue, the economic environment needs to become more supportive,” Dudley said.
The remarks were taken as the latest sign that the Fed is moving toward another round of so-called quantitative easing, in which the central bank buys Treasury securities from banks to push down long-term interest rates.
Doing so would tend to weaken the dollar by suppressing the interest rates investors can expect to earn on assets here. The dollar tumbled again, with the trade-weighted dollar index falling to its lowest level since January. The dollar fell to $1.37 to the euro and was under 84 yen.
The remarks also marked a response to comments in recent weeks by some skeptics within the Fed of the merits of QE.
Dudley was particularly blunt on the subject of inflation, warning that declining inflation expectations meant the Fed “must be clear and resolute in its commitment to its price stability objective.”
The Fed fingered low inflation as a threat to recovery for the first time in its statement last month. The worry is that falling inflation could retard growth by raising the real cost of borrowing.
“As long as inflation remains muted, QE2 remains an inevitability,” said CMC Markets strategist Ashraf Laidi.
At the same time, the Fed’s statement Sept. 21 was somewhat inconsistent, claiming at once that inflation readings were too low but that inflation expectations were stable.
Dudley made clear Friday that, unlike some other people on the 10-member Fed policy board, he isn’t ambivalent on the issue.
Though another round of Fed action has many critics, proponents believe the Fed can shelter a weak economy from another shock by keeping rates low, giving household balance sheets more time to recover from the meltdown of 2008.
So households may get more dollars. The big question now is what they will be worth.