Federal Reserve Governor Sarah Bloom Raskin said the weaker-than-anticipated boost to U.S. growth and employment from record monetary stimulus shouldn’t discourage policy makers from further easing.
While the effects of Fed actions have been “somewhat more muted than I might have expected,” that shouldn’t imply that additional easing “would be unhelpful,” Raskin said today in a speech in Washington. “Indeed, the opposite conclusion might well be the case -- namely, that additional policy accommodation is warranted under present circumstances.”
Officials should consider a “wide array of approaches for promoting job creation” given high unemployment and the length of time many people have been out of work, Raskin said. The former Maryland bank-regulation chief said Fed Chairman Ben S. Bernanke’s policies are “completely appropriate,” including last week’s effort to lower borrowing costs by shifting $400 billion of Treasuries to longer maturities.
“To the extent that some factors may attenuate the usual effectiveness of monetary policy, there is a compelling case to identify and implement policy measures to mitigate those factors and thereby strengthen the effect of the monetary accommodation that we have already put in place,” Raskin, 50, said at a forum hosted by the University of Maryland’s Robert H. Smith School of Business.
Responding to audience questions afterward, Raskin said she would be “quite leery” of tolerating higher inflation or price expectations as a path to achieve lower real interest rates and boost growth. “One of the explicit mandates of Congress is price stability and keeping inflationary expectations anchored is, in my mind, extremely important,” she said.
The “unusual persisting factors” weakening the effects of Fed actions include the “excess supply of housing and impaired access to credit for many households and small businesses,” she said in her first talk devoted to monetary policy since joining the central bank almost a year ago.
The Federal Open Market Committee said Sept. 21 it will buy securities with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less.
The so-called Operation Twist “should exert downward pressure on longer-term interest rates and help make broader financial conditions more accommodative, thereby supporting a stronger economic recovery,” Raskin said, reiterating a point from the FOMC’s statement. The FOMC cited “significant downside risks to the economic outlook, including strains in global financial markets.”
The Fed also agreed to switch the reinvestment of its holdings of maturing housing debt to mortgage-backed securities from Treasuries. “Our announcement appears to have been successful in narrowing the spread between rates on agency MBS and Treasury securities of comparable maturity,” a spread that had “widened substantially since earlier this year,” threatening to raise home-loan costs, Raskin said today, referring to mortgage-backed securities.
The U.S. economy expanded at a 1 percent annual pace in the second quarter, the government said Aug. 26, reducing the initial 1.3 percent estimate. Growth may be accelerating to 1.8 percent in the third period, according to the median estimate of 66 economists surveyed by Bloomberg News from Sept. 2 to Sept. 7. The International Monetary Fund last week cut its U.S. growth projection for 2011 to 1.5 percent from 2.5 percent in June.
The housing market remains “depressed,” in the FOMC’s words, even after three years of low mortgage rates. New-home sales fell for the third straight month in July to an annual pace of 298,000, just above the record low pace of 278,000 sales in August 2010. The national average 30-year fixed-rate mortgage is at 4.09 percent, the lowest on record in a Freddie Mac index.
She defended the central bank’s near-zero benchmark interest rate since December 2008, saying that the Fed “saved millions of jobs that would otherwise have been lost.” The August decision to pledge unchanged rates at least through mid- 2013 represents “forward guidance” that can lower longer-term interest rates and boost consumer and business spending, Raskin said.
“Combined with widespread unemployment, housing and stock price declines, and increasing rates of mortgage defaults, foreclosures, and bankruptcies, the assets of many American families have been significantly eroded,” Raskin said today. “The effect of these developments may be to attenuate the revival of normal consumption patterns that would otherwise be dictating increases in consumer demand and growth.”
Raskin, an attorney, was appointed in 2007 as Maryland’s top banking regulator and nominated to the Fed last year by President Barack Obama. She was previously managing director of Promontory Financial Group, a consulting firm, and worked at the New York Fed and as a counsel for the Senate Banking Committee.
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