Q&A with NY Fed's William C. Dudley

Few people wield the economic power and responsibility of William C. Dudley, president of the Federal Reserve Bank of New York.

He is the No. 2 person, after Fed chief Ben Bernanke, on the Federal Open Market Committee, which meets eight times per year in Washington to set interest rates. The committee’s decisions affect the cost of everything from home mortgages and credit cards to earnings on savings accounts. Its goals: keep inflation low and create jobs.

Dudley was on Long Island last week to hear the concerns of business owners, workers and scientists. The Island is part of the New York Fed’s district, which encompasses New York State, Puerto Rico, the U.S. Virgin Islands and portions of New Jersey and Connecticut. The bank regulates financial activity and is home to the world’s largest gold depository.

He has spent much of his career as an economist, including 20 years at the investment bank Goldman, Sachs & Co. He joined the New York Fed in 2007, becoming president two years later when his predecessor Timothy F. Geithner was appointed U.S. Treasury secretary.

Dudley, 59, played a key behind-the-scenes role in the Fed’s response to the 2008 financial crisis. Here are excerpts from his Newsday interview:

The housing market on Long Island is still suffering. What's the outlook?

Long Island's housing sector is still under a lot of stress. The foreclosure rate is higher than the state or national average .?.?. The good news is the economic recovery is under way and there have been reasonable job gains over the last few months. As you get more employment, you get more household formation. As you get more household formation, you get more demand for housing, and I think that's going to be the key.

Is there something fundamentally wrong with Long Island's housing market that makes it an outlier in the state?

Long Island saw a pretty big increase in home prices from 2000 to 2006. Prices roughly doubled and so that meant there probably was a pretty good overshoot here in terms of what was sustainable. Prices have come down 20 percent or so; the national average is somewhat more than that .?.?. But I think people basically got pulled into the boom here a little bit more than they did in other places.

With interest rates already very low and expected to remain so until 2014, what more can the Fed do to revive home sales and new home construction?

The first thing we can do is have appropriate monetary policy that stimulates the economy -- that will help support housing. The second thing we've done is we've tried to point out some of the problems in the housing market. There were some impediments to refinancing that mean people with high mortgage rates can't refinance into lower mortgage rates .?.?. We have a lot of real estate owned [i.e., foreclosed homes owned by banks] yet we have rental prices going upward. So, getting those real estate owned units back out into the market, rented up, would also be helpful.

Seniors, who generally rely on savings tied to interest rates, complain that the Fed's policy of keeping rates very low is hurting their standard of living. Do seniors have a point?

In an ideal world we'd have a strong economic recovery and we'd have higher interest rates for savers. But faced with one or the other, we [FOMC members] think that generating an economic recovery is job one for us at this stage. If we do that successfully, then interest rates can move up over time and savers can start to get a higher return on their savings.

You were involved in the Fed's response to the 2008 financial crisis. Now, Occupy Wall Street protesters and others say the big banks should have been allowed to fail. How do you respond?

I completely understand why people are unhappy about the unfairness of some of the large banks and bank executives having their jobs saved. That was an unfortunate byproduct of what we had to do. A lot of this is just a lack of familiarity with what the Fed is trying to do .?.?. We're here for Main Street. Our mission is all about maximizing sustainable employment and price stability for the country writ large. Wall Street is not important to our core mission at all. And I think there is a fundamental misunderstanding about that.

What is the biggest challenge facing Long Island's economy and how should it be addressed?

I would say that Long Island, like most of this region [served by the New York Fed], is a relatively high-cost place to do business. To overcome that burden you have to basically make it attractive in other ways .?.?. the biggest thing is making sure you have the most well-qualified, well-educated workforce; have good infrastructure; have good leisure activities, so that people want to locate here.

Small businesses, which dominate the local economy, complain about access to credit since the financial crisis. They say nervous regulators are discouraging lenders from making loans. Is this really a problem and what remedies can the New York Fed provide?

We are not where we want to be yet, but I would say things are improving .?.?. When I talk to some of the big bankers they are very aggressive now in terms of expanding their small business lending. I think where you still really have a problem in the small-business sector is the startup company: the person that before was relying on their home as the source of funding, or their credit cards, and now credit availability through the credit card has been very much tightened up.

Negotiations to avert a financial collapse in 2008 were so intense you spent a night or two sleeping on your office floor. How did you find the experience?

It was pretty easy because it was two o'clock in the morning. My choice was to get to the hotel at 2:45 and get up at 5:30. And I thought, gee, you know 45 minutes more on my office floor would be pretty attractive. I was so tired that I had no trouble falling asleep. I just put my coat down and curled up .?.?. It was no hardship.

SNAPSHOT

Name. William C. Dudley

Current job. President, chief executive of Federal Reserve Bank of New York

Age. 59

Salary. $410,780 (as of 2010)

Hometown. Cranford, N.J.

Family. Wife, Ann E. Darby, is chairwoman of the investment committee at Douglass College.

Last book read. "Steve Jobs" by Walter Isaacson

Spends spare time. Hiking, golf

Education. PhD, economics, University of California at Berkeley; BA, economics, New College of Florida

Past jobs. Markets group executive vice president, Federal Reserve Bank of New York; partner, chief U.S. economist, Goldman, Sachs & Co.; economist, Federal Reserve Board

Raised. Agawam, Mass.

Last vacation. Palm Springs, Calif.