Fed will do what it takes to boost jobs, Dudley says

The US Federal Reserve will closely monitor all corners of the ailing labor market and is willing to ramp up asset purchases if need be, an influential Fed official said on Tuesday in a broad defense of the central bank's latest policy easing effort.

New York Fed President William Dudley said he is confident that any costs associated with the third round of quantitative easing, or QE3, announced last week are manageable and that the economy needed a "nudge in the right direction."

Dudley, a close ally of Fed Chairman Ben Bernanke and a key barometer of the thinking inside the central bank, said he is watching for a "substantial" improvement in the US labor market - meaning payroll growth must be supported by stronger economic growth, and a drop in unemployment cannot be due mainly to a falling participation rate.

"If the economy is weaker, we'll do more" asset purchases, he said in prepared remarks to the Morris County Chamber of Commerce. "If the economy is stronger, and we see a substantial improvement in the outlook for the labor market sooner, we'll end up doing less."

Dudley added: "If you're trying to get a car moving that is stuck in the mud, you don't stop pushing the moment the wheels start turning - you keep pushing until the car is rolling and is clearly free."

The Fed in late 2008 slashed interest rates to near zero and has since bought $2.3 trillion in long-term securities in an unprecedented drive to spur growth and revive the economy after the worst recession in decades.

Yet the recovery, especially in jobs, has been slow and economic growth stumbled this year, leading the central bank to say it expects to keep rates at rock bottom at least through mid 2015.

Last week the Fed launched an aggressive plan to pump $40 billion into the economy per month with no set end date. Instead, the Fed will buy mortgage debt and possibly Treasuries until the labor market outlook improves substantially - a term that many on Wall Street and elsewhere are trying to define.

Addressing this question, Dudley said the Fed will watch the unemployment rate - which was 8.1 percent last month - as well as payroll growth, the amount of Americans who have given up the hunt for work, the employment-to-population-ratio, and job finding rates.

At year end, when a separate Fed program to swap shorter-term Treasuries for longer-term ones expires, further purchases of Treasuries will depend on an assessment of costs and benefits and on labor improvement, said Dudley, who as head of the important New York regional Fed bank has a permanent vote on Fed policy.

Ultimately, the Fed is looking for a stronger recovery alongside stable prices, he said. "When that finally materializes, I'll view it as consistent with the result we are trying to achieve, and not a reason to pull back our policies prematurely," Dudley added.