Fed Officials Raise Asset-Purchase Option Even as U.S. Economy Improves
Some Federal Reserve officials are saying the central bank should keep the option of further asset purchases on the table even as the economy strengthens, deepening divisions with colleagues who oppose further action.
Chicago Fed President Charles Evans in a speech today said economic growth is modest and called for “substantial” accommodation. During the past week, New York Fed President William Dudley, Boston’s Eric Rosengren and San Francisco’s John Williams have also backed consideration of a third round of bond buying.
The calls preceded release of the Fed’s Beige Book today indicating the expansion improved last month in most of the U.S. on increased holiday retail sales, demand for services and oil and gas extraction. Other data in the past week showed the unemployment rate dropped to the lowest level in nearly three years and consumer credit jumped.
“The financial market has taken recent Fed commentary as generally dovish and as a signal that the Fed is perhaps exploring more easing measures,” said Joseph LaVorgna, chief U.S. economist for Deutsche Bank Securities in New York, using a term used to refer to policy makers who tend to favor easing.
Central bank officials are far from unanimous on the option of buying more assets. Philadelphia Fed President Charles Plosser said today that policy makers should watch “very carefully” for the risks of accelerating inflation, and Richmond’s Jeffrey Lacker said he is “nervous” about the Fed’s independence because of its forays into fiscal policy.
For First Time
The policy-setting Federal Open Market Committee next meets in Washington on Jan. 24-25. The Fed’s 12 presidents and five governors will, for the first time, publish their own expectations for the future course of monetary policy. Not all policy makers agree, as recent speeches from U.S. central bankers have demonstrated.
The Fed’s Beige Book, an anecdotal survey of economic conditions in the central bank’s regions, may reinforce the views of a majority of Fed officials, who see an economy that’s expanding without being strong enough to reduce joblessness as quickly as they would prefer. The report said most industries saw “limited permanent hiring,” and the housing market remained “sluggish.”
At its next policy meeting, Fed officials will update their forecasts for unemployment, growth and inflation for the first time since November.
Most Fed officials in November saw inflation between 1.4 percent and 2 percent in 2012 and expected 2.5 percent to 2.9 percent growth in gross domestic product.
More Fed Action
The Chicago Fed’s Evans said today he supported more Fed action in part because his forecast for inflation is at the “lower end” of his colleagues’ expectations.
“The traditional course of action when inflation is below target and real output is expected to be below potential is to run an accommodative monetary policy,” Evans said. “I support such accommodation today. And I believe the degree of accommodation should be substantial.”
Evans, who dissented at FOMC meetings in November and December in favor of greater accommodation, doesn’t vote on policy decisions this year after a rotation among Fed presidents.
Evans, Plosser, Dallas Fed President Richard Fisher and Narayana Kocherlakota of the Minneapolis Fed rotate off the committee this year. Replacing them are Williams, Lacker, Atlanta’s Dennis Lockhart and Cleveland’s Sandra Pianalto.
Of the new voting members, Williams said yesterday that he sees a “strong” case for new purchases of mortgage bonds given his expectation that inflation will fall below 1.5 percent this year.
More Purchases
Lockhart said in a November speech that he was “skeptical that further asset purchases will produce much gain in terms of increased economic activity.”
In a speech today in Atlanta, Lockhart repeated Jan. 9 remarks in which he said given inflation near 2 percent and “slow progress” reducing joblessness, he didn’t want to “lock into a rigid position” on additional Fed policy easing.
Cleveland Fed President Sandra Pianalto said yesterday that, according to some economic models, further action may be needed.
“While it is true that the federal funds rate has been near zero for some time, some economic policy models indicate that monetary policy should be even more accommodative than it is today,” Pianalto said in a speech in Wooster, Ohio. “And this is true even after accounting for the large-scale asset programs the FOMC has initiated to compensate for the fact that the federal funds rate cannot go below zero.”
Cut Main Rate
Fed officials lowered their benchmark interest rate to near zero in December 2008 and at their most recent meeting said they expect to leave it there through at least mid-2013. The Fed also initiated two rounds of large-scale asset purchases, or quantitative easing, buying $2.3 trillion in assets. In September the Fed announced it would sell $400 billion of short- term bonds and buy $400 billion of longer-term bonds in a move known as Operation Twist.
The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,292.48, the highest level in five months, at the close of trading in New York. The yield on the 10-year Treasury note declined six basis points to 1.90 percent. A basis point is 0.01 percentage point.
In an interview on CNBC, Richmond’s Lacker said he is concerned how the central bank will be treated in the 2012 elections.
“I haven’t seen as much threat to our independence in my career here as we’ve been seeing in the last couple of years,” Lacker said. “I’m a little nervous about how the Fed’s going to be treated in this electoral cycle.”
Criticized by Republicans
Fed Chairman Ben S. Bernanke and the central bank were criticized by Republicans this week for a housing study sent to Congress that, in the words of Senator Orrin Hatch of Utah, “intrudes too far into fiscal policy advice and advocacy.”
Hatch, the senior Republican on the Senate Finance Committee, was joined in his criticisms by Tennessee Senator Bob Corker, who said Dudley’s suggestion last week that Fannie Mae and Freddie Mac reduce the principal of the loans they guarantee was “absolutely egregious.”
To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net
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