Home > About BNE > Press Room > 2010 Archive > October > A Top Federal Reserve Official Praises Region's Pluck

A Top Federal Reserve Official Praises Region's Pluck

By David Robinson

October 28, 2010
 
 The Buffalo Niagara region's response to economic pain over the last three decades and its stable housing market have helped it weather the Great Recession better than most other parts of the country, a top Federal Reserve official said Wednesday.

William C. Dudley, president of the Federal Reserve Bank of New York, said the painful decline in manufacturing in Buffalo Niagara has helped spawn a more diversified local economy. Combined with a stable housing market, he said, this has limited the job losses locally and helped the region weather the downturn relatively well.

"I think the region is in a better position," Dudley said in an interview before giving a speech at the University at Buffalo's North Campus in Amherst.

While the restructuring has been very painful, costing the region thousands of high-paying factory jobs and hindering economic growth here for decades, he said, the growth of the local service sector has resulted in a more diverse and productive economic base that has helped insulate Western New York from the most severe blows during the latest downturn.

"I think you'll see the region has a little less cyclicality," he said, citing the development of the Buffalo Niagara Medical Campus and the growth of the banking industry here as increasingly important parts of the regional economy.

While home prices in Buffalo Niagara remain among the lowest in the nation, the lack of a housing boom during the early part of the last decade meant that local homeowners also missed out on the ensuing housing bust.

"Another part of the story is that homeowners in upstate New York did not take on as much debt, and households have been less strained here than elsewhere," Dudley said. "One reason is that home prices did not appreciate rapidly here, so homes remained affordable."

While nearly 1 in 4 homeowners with a mortgage nationally has a loan that is for more than the current value of their home, fewer than 1 in 20 mortgages in Buffalo Niagara are "underwater," according to statistics cited by Fed economists.

"You'll get the monetary policy and the fiscal policy that's designed for the country as a whole, even though you're starting from a somewhat relatively better position in terms of the state of household finances," Dudley said. "I think that means you'll probably get a little bit more boost from the real stimulative monetary and fiscal policies than in other areas where lots of people have mortgages that are underwater and therefore can't take advantage of the drop in long-term interest rates."

Dudley said the region's colleges and universities, which produce more than 20,000 graduates a year, give the area a work force that is better educated than the national average and the potential for university-backed research that could spawn fast-growing businesses.

"I think that's a hugely competitive advantage for the region," Dudley said. "The challenge is to utilize all the research dollars that are flowing through the major universities in a way that knowledge ends up supporting start-up companies and businesses that locate in the region. There's some of that, but it's pretty limited relative to the amount of research dollars that are actually flowing through universities."

Dudley's visit to Buffalo also included a stop at the General Motors engine plant in the Town of Tonawanda. His visit was part of a three-day swing through upstate New York to gather insights about a regional economy that is vastly different from the New York Fed's home base in Manhattan.

Dudley's prepared remarks, which were virtually identical to speeches he gave earlier in the week in Ithaca and Rochester, repeated his contention that unemployment and inflation currently are at unacceptable levels.

Dudley, a permanent voting member of the Fed's interest-rate setting Federal Open Market Committee, has advocated further Fed action to stimulate the economy, although he has not said exactly what steps the central bank should take.

"The Fed cannot wave a magic wand and make the problems remaining from the preceding period of excess vanish immediately," Dudley said. "Even with our best efforts, the road to full recovery here in upstate New York and elsewhere is likely to be long and bumpy."

Many economists expect the Fed to adopt a strategy at its early November meeting to resume buying long-term assets, primarily Treasury bonds.

While the Fed's actions since the financial crisis began three years ago already have cut interest rates almost to zero, additional asset purchases would flood financial markets with cheap money. The strategy also would raise expectations for inflation, which supporters believe would help prevent stagnating prices from undermining the recovery.

But other economists, as well as some Fed officials, wonder how effective that strategy will be, coming at a time when the costs of borrowing already are at historic lows and liquidity is strong.

Dudley said the economy has hit a "soft patch" in its recovery, with growth slowing as debt-strapped consumers remain reluctant to ramp up their spending and the nation's housing market stays weak. At the same time, with unemployment running at 9.6 percent nationally, and many workers with jobs enduring pay cuts and other income-reducing cutbacks since the downturn began, consumers are grappling with financial constraints that may linger.

"Have households completed their deleveraging, so they will soon spend more?" Dudley said. "Although we believe that substantial progress has been made, it is hard to tell whether this has run its course."

drobinson@buffnews.com