WASHINGTON — A top Federal Reserve official said Wednesday that a decision on reducing the central bank's unprecedented economic stimulus efforts still is three to four months away as policymakers first must determine if the recovery is strong enough to handle such a pullback.
"It’s really about achieving escape velocity," William C. Dudley, president of the Federal Reserve Bank of New York, told Bloomberg TV.
"When are we going to have an economy where everything is sort of self-reinforcing: the jobs generate income, the income generates demand, the demand generates more employment," he said in an interview that was taped Tuesday. "I don’t think we’re quite there yet."
Dudley's comments came as Fed Chairman Ben S. Bernanke was set to testify Wednesday before the Joint Economic Committee on Capitol Hill.
Investors are keenly interested in comments by Fed policymakers about when they might start reducing the $85 billion in bonds the central bank has been purchasing each month since September to try to stimulate economic growth.
Bernanke said in March that the Fed might gradually ratchet down its purchases if the labor market continues to improve. He could elaborate on that at Wednesday's hearing as some Republican lawmakers are expected to press the Fed to end its stimulus efforts.
Dudley is a key member of the central bank's policymaking Federal Open Market Committee and closely allied with Bernanke. Dudley said the economy has done "quite well" this year in the face of the fiscal drag caused by higher taxes and reduced government spending.
But he said it's too soon to tell the true impact of that fiscal drag, which includes about $85 billion in automatic federal spending cuts that have just started to be implemented.
"I’m uncertain about what’s going to happen to the economic outlook over the near term because I don’t really understand really well how the tug of war between fiscal drag and the improving economy are going to work their way out over the next couple of months," Dudley said.
"Three or four months from now, I think you’re going to have a much better sense of if the economy is healthy enough to overcome the fiscal drag or not," he said.
The key for Dudley would be if improvement in the jobs market is backed by increased economic activity that indicates that improvement would continue.