Fed Officials Divided Over Easing as They Prepare Interest Rate Forecasts
Federal Reserve officials disagreed on the need for more easing amid signs of improvement in the economy that may shape the interest-rate forecasts they will reveal for the first time this month.
Chicago Fed President Charles Evans in a speech yesterday 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 report on regional economies, which indicated 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.
“Despite recent signs of improvement, Fed officials are very vigilant about the economic recovery continuing and improving,” said Sung Won Sohn, former chief economist at Wells Fargo & Co. who is now a professor at California State University-Channel Islands in Camarillo. “Fed officials not only want to see improvement, but levels of economic activity far higher than they are today.”
Still, central bank officials are far from unanimous on the need to consider a third round of large-scale asset purchases to boost growth.
Philadelphia Fed President Charles Plosser said yesterday that policy makers should watch “very carefully” for the risks of accelerating inflation, and Kansas City’s Esther George said Jan. 10 that too much accommodation can raise the odds of financial instability. Richmond’s Jeffrey Lacker said he is “nervous” about the Fed’s independence because of its forays into fiscal policy.
At the next Federal Open Market Committee meeting 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.
“They’ve already committed to an increased communications policy -- including, for the first time, sharing fed funds rate projections -- and that will be the most meaningful outcome of the meeting,” said Jim McDonald, chief investment strategist for Northern Trust Corp. in Chicago, which has $645 billion in assets under management. “I just don’t see enough evidence of an economic slowdown for them to have support to implement additional easing.”
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 purchased $2.3 trillion of securities in two rounds of large- scale asset purchases, or quantitative easing. In September, the Fed announced it would replace $400 billion of short-term bonds with $400 billion of longer-term bonds, a move known as Operation Twist.
The Beige Book, an anecdotal survey of economic conditions in the central bank’s regions, said most industries saw “limited permanent hiring,” and the housing market remained “sluggish.”
The Standard & Poor’s 500 Index (SPX) rose less than 0.1 percent to 1,292.48, the highest level in five months, at the close of trading in New York yesterday. The yield on the 10-year Treasury note declined six basis points to 1.90 percent. A basis point is 0.01 percentage point.
At its next policy meeting, Fed officials will also provide their forecasts for unemployment, growth and inflation for the first time since November.
The Chicago Fed’s Evans said he supported more Fed action 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 in a speech in Lake Forest, Illinois.
Evans, Plosser, Dallas Fed President Richard Fisher and Narayana Kocherlakota of the Minneapolis Fed leave the committee this year after a rotation among Fed presidents. Replacing them are Williams, Lacker, Atlanta’s Dennis Lockhart and Cleveland’s Sandra Pianalto.
Of the new voting members, Williams said Jan. 10 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.
In a speech yesterday in Atlanta, Lockhart repeated Jan. 9 remarks in which he didn’t want to “lock into a rigid position” on additional easing, given inflation near 2 percent and “slow progress” reducing joblessness. The unemployment rate fell to 8.5 percent in December, down from a peak of 10 percent in October 2009.
Cleveland Fed President Sandra Pianalto said Jan. 10 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.
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