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State banking leader is cautiously optimistic;

William C. Dudley is one of the most prominent and powerful regulators in America. But most people don't know who he is.

As president of the Federal Reserve Bank of New York, Dudley heads one of the 12 regional districts within the Federal Reserve system, created in 1913.

In that role, he is also a member of the Federal Open Markets Committee, the interest-rate policy-setting body that includes the five governors of the Federal Reserve Board and the 12 Reserve Bank presidents. But unlike his 11 peers at the other banks who rotate with a vote, he is a permanent voting member with the five governors.

That's because his bank regulates many of the nation's biggest "money-center" and Wall Street banks, and implements the committee's policy decisions through its Markets Group that buys and sells securities on Wall Street to raise or reduce the supply of money.

Dudley, whose district includes Buffalo, visited Western New York last week on a speaking tour.

>Q: What's the outlook for the national economy?

A: We're doing a little bit better. The recent data does show signs of improvement. That said, do I think we're out of the woods yet? Unfortunately, not.

I think there are a couple of things we have to be aware of. One, we had an unusually mild winter. This may be distorting some of the economic news.

Two, we saw these kinds of improvements in the economy before, in 2010, 2011, early in the year, and they petered out as the year went on. So we have to be careful not to count our chickens too soon.

Number three, there are still some downside risks. One risk is higher gasoline prices and how that's going to affect consumer purchasing power. Another risk is developments abroad, in terms of their demand for our goods and services. A third risk is the fiscal outlook for the United States. The fact is that right now, the federal policy is that, if nothing is done, we're going to have a very large fiscal contraction early in 2013, over 3 percent of GDP. So there is some political risk that if this isn't addressed before then, that could actually be a big blow for the economy early next year.

>Q: Fiscal contraction?

A: If there's no change, the payroll tax cuts will expire, the unemployment compensation benefit extension will expire automatic spending cuts [will kick in], and the Bush tax cuts will expire. This is all happening all at once, at the beginning of 2013 We would like to see something that begins more slowly.

>Q: What's the outlook for interest rates?

A: We currently anticipate that short-term rates will be exceptionally low until at least late 2014. I don't see anything that suggests that we should be changing that.

>Q: You sit on the Federal Open Markets Committee. What's it like?

A: Well, I think that we have a very heartfelt discussion with lots of people from different parts of the country. So you have the 12 Federal Reserve Bank presidents, plus the five current sitting Board of Governors members, so a lot of different perspectives, reflecting differences in background. We have business people who sit on the FOMC, we have academics, we have people who have market experience like myself. So a lot of different perspectives, so a lot of different points of view.

Oftentimes you see that there are different perspectives offered up in terms of what is the appropriate policy going forward. But all 17 of those people are fully committed to what Congress has established as their dual mandate, following a monetary policy that generates maximum sustainable employment in the context of price stability. We may have some disagreements about how best to achieve that dual mandate, but we're all in agreement that that's what we need to do.

>Q: Why are you "first among equals" among Fed bank presidents?

A: It's how the Federal Reserve Act is written. The New York Federal Reserve is a little bit different from the other Reserve Banks, not so much just because the president has a permanent vote on the FOMC, but the Federal Reserve Bank of New York in many ways is the operational arm of the Federal Reserve Board in Washington.

When you look at the financial crisis and you think about all the special interventions that were done to save the financial system and protect the U.S. economy, a lot of them were developed jointly with the Board of Governors and they were all implemented by New York.

I ran what was called the Markets Group prior to becoming president. The Markets Group doesn't exist in any of the other Reserve Banks.

>Q: Is it a challenging job?

A: Certainly over the last few years. Obviously, I started at the New York Fed as the head of the Markets Group in early 2007. It was pretty quiescent for a few months, and then beginning in August 2007, things got very, very interesting for a multiple-year period.

Now we're still very, very busy, because we're trying to do everything we can to make sure we never have a repeat of this kind of financial crisis in the future We don't really ever want to be in this position again.

The Federal Reserve was put in the position where we basically had to save individual institutions to prevent the financial system from collapsing. That created the misimpression that we were trying to save individual institutions. We weren't trying to save individual institutions for themselves. We were trying to do it because we felt that was what was necessary to protect the U.S. economy. If we let the major financial institutions fail, the financial system collapse, it would have been a far worse outcome.

>Q: How is Buffalo faring?

A: It's doing OK. The recession here was milder than for the country as a whole, in part because the country as a whole was very much a part of the housing boom and bust. There really was no housing boom in the Buffalo region, and therefore there was no housing bust.

Since the recession ended, the Buffalo recovery is sort of very similar to the recovery in the country as a whole. What's interesting about Buffalo is for years of the manufacturing sector shrinking, Buffalo manufacturing is actually adding jobs. That's a really promising development, because it really sort of suggests that this very long economic structural transformation in Buffalo, which is very painful, as you went from very much focused on manufacturing to manufacturing being downsized very significantly that's pretty far along.

Now Buffalo has world-class educational and world-class health care, so it really does have a really good foundation to build on going forward. The big challenge for the region is to really build on those assets. One thing that we think is really important is to try to take more of the innovation and research and development flow that's coming out of the educational establishment to seed new business start-ups in the region to create jobs here and therefore keep young people here.

The challenge is really generating good labor market opportunities for young people, so that they'll stay here. It's unfortunate if you educate people here and then they leave.

>Q: How are Western New York banks doing?

A: They're doing very well, actually. It's partly because there wasn't the housing bust here, but we think the state of banks here is actually quite good. They're healthy. Almost all of them are profitable. We don't have a lot of concern.

There's still an issue about the availability of credit, especially to small businesses. The recession did hurt here, just as it did nationally, and so that affected the credit history of a lot of people and businesses, so that's making it hard for households and businesses to obtain credit.

>Q: What do you say to traditional bank depositors?

A: We understand this is not an ideal world. In an ideal world, we wouldn't have had a deep recession, we wouldn't have very low interest rates right now. But we're doing this to try to generate the strongest possible recovery so that we can normalize rates quicker.

>Q: The Fed used to be much bigger here. Are you committed to Buffalo?

A: We're very committed to the region. I was here in 2010. I'm here today. We have two really crack researchers that live and work in the area. Our ability to understand what's going on here and contribute to the debate and discussion about the region has not been impaired.

It's really about efficient use of tax dollars. We had this big Buffalo branch facility but it was mostly empty. It was expensive to keep in operation. We felt we could get all the benefits of still having the researchers here on the ground and save the taxpayer a great deal of money. So, it's not any lessening of our commitment to the region.