02 12 2014

Fed official: Dreary days for U.S. economy may be over

After years of disappointment, America's economy may truly be on track. That's the belief of one of America's top economic policymakers, New York Fed President William Dudley.

Despite some headwinds, Dudley is optimistic that America could grow closer to 2.5% to 3% in the coming year instead of the ho-hum 2% growth that has been a hangover of the Great Recession.

"The U.S. economic outlook looks brighter, with growth likely to be somewhat above the trend of the past five years," Dudley said in a speech on Monday
In fact, Dudley thinks the economy could soon be healthy enough for the central bank to lift interest rates off the ground.
He pointed to a number of issues that have gone from the equivalent of traumatic injuries to mere bumps and bruises.
Related: U.S. economy picks up speed
Housing, spending improve: The housing sector looks much healthier these days as excess homes have mostly been gobbled up. Also, rising house prices have lifted many Americans who were underwater on their mortgages.
Dudley is also optimistic because personal finances don't look so ragged. People have stopped binging on debt, and many have refinanced their mortgages at more affordable rates. Some households are also benefiting from the rising stock market performance.

Another easing headwind is government spending. Years of belt-tightening on the federal, state and local levels could soon be over.
Cheap gas is good for America: One new positive for the U.S. economy is plunging energy prices. The national average price for a gallon of gas tumbled to $2.769 on Monday, according to AAA.
"This will lead to a significant rise in real income growth for households and should be a strong spur to consumer spending," Dudley said.
That's especially true for households that live paycheck to paycheck and are thus more likely to spend, not save, the extra cash they have on hand.
Dudley doesn't sound too worried about lower oil prices hurting the U.S. shale industry. He noted that despite the boom, oil and gas investment remains a small fraction of the economy. Dudley also pointed to productivity gains that have cut costs.
Related: Plunging oil takes ruble with it
Fed hike = good news: Of course, Dudley acknowledged the economic outlook could darken once again, especially given that ongoing geopolitical risks "remain substantial."
Still, he's signaling the Fed will likely be able to raise interest rates in 2015.
"While raising interest rates is often portrayed as a difficult task for central bankers, in fact, given the events since the onset of the financial crisis, it would be a development to be truly excited about," Dudley said.
"When the [Fed] begins to raise its federal funds rate target, this would indicate that the U.S. economy is finally getting healthier," he explained.