Fed’s Dudley Says Euro ‘Absolutely’ Will Survive Debt Crisis

By Scott Lanman - Nov 18, 2011 6:30 AM GMT+0700

Federal Reserve Bank of New York President William C. Dudley said he’s confident Europe’s common currency will withstand the continent’s sovereign-debt turmoil.

“I absolutely think the euro survives,” Dudley said yesterday in an interview with PBS television’s “Nightly Business Report,” which released a transcript today. “The important thing to recognize here is the European leadership is fully committed to the euro. They’re fully committed to the European Union.”

Dudley and his Fed colleagues are watching Europe’s crisis for possible harm to America’s financial markets and economy. Fed Vice Chairman Janet Yellen said last week that recent turmoil underscores the need for “forceful action” by European leaders to curb the panic.

“There’s a real commitment among leadership in the core countries like France and Germany that they want to move in that direction” of greater fiscal union, Dudley said. “They don’t want to abandon the euro. They don’t want to abandon the European Union.” The “difficult problem” is managing “all these conflicting interests,” he said.

Also in the interview, Dudley, 58, said the Fed can take additional steps to ease monetary policy, points he made in a speech today in West Point. “We could probably make more further progress” in saying what would get the central bank to raise interest rates, such as levels of unemployment or inflation, he said.

Help Housing Market

The Fed could also buy more mortgage-backed securities, an “obvious area to consider” because it would help the housing market, Dudley said.

On keeping interest rates near zero until joblessness declines to a certain level, the “general framework I think is something that we definitely want to explore,” Dudley said. “The devil is in the details” in getting policy makers to agree on specific numbers, he said.

A European recession would hurt demand for American goods and services and have “some consequences for U.S. banks,” Dudley said in the interview.

“We think that European situation is definitely solvable,” he said. “Their fiscal position is certainly no worse than the U.S. The problem is a political one.”

Asked if there’s anything the Fed can do to “help Europe help itself,” Dudley responded that the Fed had already opened currency-swap lines with counterparts including the European Central Bank.

“This backstop I think has been helpful in supporting European banks and helpful in making it so that they can continue to do business and support the U.S. economy through their activities,” Dudley said in the interview.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net