Fed Officials Weigh Further Easing Options Even as Economy Gains Strength
Federal Reserve policy makers are developing options for further monetary easing even as better- than-forecast economic reports have allayed concerns that the U.S. is on the verge of a renewed recession.
Fed Vice Chairman Janet Yellen said yesterday that a third round of large-scale asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.” A day before, Governor Daniel Tarullo said buying mortgage-backed securities “should move back up toward the top of the list of options.”
They join Charles Evans, president of the Chicago Fed, and Boston’s Eric Rosengren in calling for consideration of further stimulus to boost growth and bring down a jobless rate stuck around 9 percent or higher for 30 months. A stock-market rally and gains in manufacturing and retail sales may convince the Federal Open Market Committee, which meets Nov. 1-2, to decide that it’s too soon for a third round of bond purchases.
“We’re seeing somewhat of a pickup of growth, but nothing spectacular,” said Roberto Perli, managing director in charge of policy research at International Strategy and Investment Group in Washington and a former economist in the Fed’s monetary affairs division. “Since that’s the case they probably don’t want to expand the balance sheet yet, but you have to start thinking about what you would do if things go back south.”
Stocks extended gains after Yellen’s speech, with the Standard & Poor’s 500 Index rising 1.9 percent to 1,238.25 in New York yesterday. Yields on 10-year Treasuries rose 3 basis points, or 0.03 percent, to 2.22 percent.
The Fed could also use communications to signal the likely future path of interest rates, a tool that may allow it to ease policy without embarking on the securities purchases that have prompted criticism from Republican presidential candidates and House Speaker John Boehner of Ohio.
Evans has proposed tying the Fed’s pledge to keep its benchmark interest rate near zero to specific levels of unemployment and inflation. That’s an approach that merits “careful consideration,” Yellen said in her speech in Denver.
The Commerce Department next week may report that the economy grew at an annual pace of 2.5 percent in the third quarter, according to the median forecast of a Bloomberg survey of 69 economists. That would mark an improvement from 0.4 percent in the first quarter and 1.3 percent in the second.
Employers added 103,000 jobs in September, up from a gain of 57,000 the month before. Retail sales last month rose by the most in seven months, and factory production climbed. The data, along with better-than-forecast corporate earnings, helped drive a 13 percent gain the Standard & Poor’s 500 Index this month.
“It looks likely that economic growth in the second half of this year will be noticeably stronger, and inflation more moderate, than in the first half,” Yellen said.
Even so, she said, the U.S. economy is vulnerable to spillover effects from Europe’s fiscal crisis. “The potential for such adverse financial developments to derail the recovery creates, in my view, significant downside risks to the outlook,” she said.
European finance ministers yesterday began a round of talks that would last through Oct. 26. Aid of $354 billion (256 billion euros) for Greece, Ireland and Portugal has failed to stabilize markets or prevent the turmoil spreading to France, co-anchor with Germany of the European economy.
“Risks from Europe could happen at almost any time, so they have to have Plan B ready should that be needed,” said Michael Gapen, a former Fed researcher who is now a senior U.S. economist for Barclays Capital Inc. in New York. “There are still longer-term impediments to growth, and therefore the U.S. economy remains perpetually exposed to adverse shocks.”
Among the impediments cited by Tarullo in a speech in New York two days ago: a high level of household debt accumulated before the financial crisis and a housing market that “continues to hang like an albatross around the necks of homeowners and the economy as a whole.”
While some economists have said the economy has hit occasional “soft patches,” Tarullo said, a more apt description is an “economy slogging through the mud and occasionally hitting stretches of dry pavement.”
“In the absence of favorable developments in the coming months, there will be a strong case for additional measures,” said Tarullo, who has backed all of Fed Chairman Ben S. Bernanke’s policy decisions for almost three years.
Fed officials are divided over whether and how to ease policy further after two decisions to lower borrowing costs with unconventional tools, first by pledging to hold the Fed’s target rate near zero through at least mid-2013 and in September by announcing it would replace $400 billion of short-term Treasuries with the same amount of longer-term bonds in a bid to push down borrowing costs.
Those moves drew dissent from Philadelphia Fed Chief Charles Plosser, Narayana Kocherlakota of Minneapolis and Richard Fisher of Dallas. Fisher and Kocherlakota signaled in speeches yesterday that they remain opposed to the Fed’s actions.
“The FOMC’s decision-making in 2011 has introduced a lack of clarity about its monetary policy mission,” Kocherlakota said in remarks at the Harvard Club of Minnesota.
The $400 billion bond-swap program, known as Operation Twist, has “so far been of greater benefit to traders and large monied interests than to job-creating businesses,” Fisher said in a speech in Dallas.
Evans and Rosengren have also urged the policy-setting Federal Open Market Committee to increase its record stimulus. Evans is calling for the Fed to keep the target for the benchmark U.S. interest rate near zero until either unemployment falls below 7 percent or the medium-term inflation outlook rises above 3 percent.
Evans’s plan “could be helpful in facilitating public understanding of how various possible shifts in the economic outlook would be likely to affect the anticipated timing of policy firming,” Yellen said yesterday.
At the same time, the approach has “potential pitfalls,” including the chance that “such thresholds could potentially be misunderstood as conveying the committee’s longer-run objectives rather than the conditions surrounding the likely onset of policy firming,” Yellen said.
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