NY FED CHIEF WARNS ON FORECLOSURE FALLOUT / THE FINANCIAL TIMES ( RECOMMENDED READING )

NY Fed chief warns on foreclosure fallout


By Aline van Duyn in New York

Published: October 19 2010 16:50

The impact of foreclosure documentation problems on the housing market is “still uncertain” and may cast a cloud over the sector for “the foreseeable future”, said William Dudley, president of the Federal Reserve Bank of New York.


Mr Dudley, speaking on Tuesday about economic conditions in the New York region, said he was particularly concerned about shocks to the economy from unanticipated sources, and this was why the Fed, together with other bank regulators, was studying what the systemic impact might be of the foreclosure delays.


“We worry about shocks from unanticipated sources,” Mr Dudley said. “Certainly, that’s why we are exploring this whole foreclosure issue to see if that’s a big problem or a smaller problem.”


Mr Dudley said New York and Northern New Jersey had seen an increase in home sales in the last year but this may reflect the tax credit for home buyers, which has now expired. “With the final expiration of this tax credit, the recent rise in home sales may well be short-lived,” he said


“With the final expiration of this tax credit, the recent rise in home sales may well be short-lived,” he said.


Mr Dudley, a member of the Fed’s policy-setting Federal Open Market Committee, is a supporter of further monetary easing, saying recently “further action is likely to be warranted” by the central bank. This was interpreted as a sign that purchases of US Treasuries by the Fed - quantitative easing - would step up in November.


Mr Dudley reiterated on Tuesday the economic conditions were “wholly unsatisfactory”. “Given the outlook that the upturn appears likely to strengthen only gradually, it will likely be several years before employment and inflation return to levels consistent with the Federal Reserve’s dual mandate,” he said.


The New York region overall has been less affected by the real estate boom and bust than other parts of the US. Still, housing falls have affected employment and also the net worth of households.


This has encouraged increased saving, debt reduction and reduced consumption. “This frugality stands in stark contrast to the first year of recovery from previous deep recessions,” Mr Dudley said. He said it was “hard to tell how much further this process has to run”.


Copyright The Financial Times Limited 2010.