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Washington - A top Federal Reserve official said Friday that the US economy and its banking system are strong enough to weather large shocks, amid worries of risks from global market turbulence.
William Dudley, president of the Fed's New York branch and a right-hand man of Fed Chair Janet Yellen, said that after nearly seven years of steady expansion and with no visible inflation threat, the main peril the economy faces is "the risk of large, adverse shocks."
He said that with monetary policy still extremely loose, or "accommodative," the Fed itself would be limited in its ability to respond aggressively to a shock.
Nevertheless, he said, "the good news is that the economy is more resilient to any shocks."
"Key sectors of the US economy, such as the household sector, seem to be in good shape. The financial system is also clearly much stronger, with the banking system much better capitalised and with much larger liquidity buffers than in the years preceding the financial crisis."
Dudley did not spell out what kind of shocks he envisaged, but Yellen said Wednesday that the economy faces risks from tighter financial conditions domestically and from the impact of slower growth and market turbulence abroad.
While she expressed confidence that the economy would continue to expand modestly, after growing 2.4 percent last year, she said those problems, "if they prove persistent, could weigh on the outlook for economic activity and the labour market."
She also singled out the fall of China's yuan and "uncertainty" about Beijing's currency policy as causing greater turbulence in global markets and pushing down the price of key commodities, which in turn could trigger financial stresses in emerging economies and major commodity firms.
"Should any of these downside risks materialise, foreign activity and demand for US exports could weaken and financial market conditions could tighten further," she said in testimony to Congress.
