Fed official: Housing, supercommittee headline economy's challenges

On the same day that the president rolled out plans to allow more "underwater" homeowners to refinance their mortgages and benefit from extremely low interest rates, Dudley called for just such a move.

An "urgent effort" to get more homeowners refinancing, which in turn puts more money in their pockets thanks to lower mortgage interest payments, could help turn the tide on a long-suffering housing market, he said.

Increased refinancings, along with other efforts to boost the housing market, could help convince potential homeowners that the worst is over, enticing them back into the market, which in turn would actually boost it.

"If prospective homeowners no longer fear that prices could decline further, they will be more willing to enter the market to take advantage of reduced prices and low financing costs, and existing homeowners will feel more confident about spending," he said in a speech at Fordham University's business school. "A vicious cycle could be replaced by a virtuous circle, in which stabilization in house prices supports spending, growth and jobs."

On Monday, housing regulators announced that they were relaxing restrictions on a government refinancing program aimed at underwater borrowers — homeowners stuck with mortgages that are worth more than their homes.

Dudley also sees a lot riding on the dozen lawmakers charged with finding $1.5 trillion in deficit cuts. If the supercommittee can find those cuts, not only will they help shore up the nation's fiscal situation, but they will show the world that "the political process can still work to make the tough choices in the national interest," he said.

He also used the speech to justify recent moves made by the Fed, which have come under fire from GOP critics. Dudley is Fed Chairman Ben Bernanke's No. 2 on the Federal Open Market Committee, which sets Fed policy, and has backed recent central bank moves that have been opposed by other Fed members.

Most recently, the Fed decided to overload its portfolio with longer-term securities, buying up $400 billion of them while selling off the same amount in short-term bonds. The move, dubbed "Operation Twist," is aimed at further lowering borrowing costs.

Dudley said the Fed's recent moves, despite critiques, act just like interest-rate cuts done in "normal times." However, he endeavored to make clear that these moves should "not be confused with fiscal stimulus or government spending."