Fed Purchases of More Bonds Opposed by Two Regional Presidents

Two Federal Reserve district bank presidents said the strengthening U.S. economy is reducing the need for additional monetary easing.

“As the U.S. economy continues to rebound and repair,” additional steps “may create an overcommitment to ultra-easy monetary policy,” St. Louis Fed President James Bullard said in a speech yesterday in Hong Kong. Atlanta Fed President Dennis Lockhart said in Washington that “we should hold the balance sheet where it is for the time being and watch how the economy evolves.”

The remarks from Lockhart and Bullard, who have never dissented from a decision by the Federal Open Market Committee, reflect broadening sentiment on the panel against further steps to spur growth. The Fed has held interest rates near zero since 2008 and purchased $2.3 trillion in bonds to spur growth after unemployment rose to as high as 10 percent in 2009. The jobless rate is now 8.3 percent, and the economy has been expanding for more than two years.

The Fed is hosting a two-day conference in Washington to examine challenges for central bankers, including the use of asset purchases to sustain liquidity during times of financial turmoil. Chairman Ben S. Bernanke opened the gathering yesterday by saying central bankers “have had to deploy a variety of new tools and approaches to carry out their responsibilities regarding monetary policy and the provision of liquidity, tools about which we still have more to learn.”

That conference today features discussions including Fed Vice Chairman Janet Yellen, Bank of England Governor Mervyn King, Bank of Japan Governor Masaaki Shirakawa and former European Central Bank President Jean-Claude Trichet.

The Fed chairman yesterday didn’t indicate if he sees a need for a new asset-purchase program.

Economy Expanded

The economy expanded at a 3 percent annual rate in the fourth quarter, the fastest pace in more than a year, as households spent more freely. Growth will probably slow to 2 percent this quarter, according to the median of 72 economists’ forecasts in a Bloomberg News survey from March 9 to March 13.

About 1.2 million jobs were created in the past six months, the most since the same period ended May 2006, Labor Department figures show.

The Fed’s preferred gauge of inflation, the personal consumption expenditures price index, rose 2.4 percent in the 12 months through January, above the central bank’s 2 percent inflation goal. Expectations of inflation five to 10 years in the future have also risen this year, according to a Fed gauge, with traders expecting 2.73 percent inflation, up from 2.37 percent at the end of 2011.

Push Forward

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said he doesn’t believe the central bank wants to push forward with more asset purchases, known as quantitative easing, “given where the inflation data are.”

“If I am wrong, I think they would start signaling it in speeches,” he said. “There are certainly plenty of opportunities to do that.”

Dean Maki, chief U.S. economist for Barclays Capital Inc. and Julia Coronado, chief economist for North America at BNP Paribas, also don’t see a prospect that the Fed will provide more stimulus.

“There is little reason to ease further,” Maki said in an interview at the Fed conference, entitled “Central Banking: Before, During, and After the Crisis.” Fed officials are unlikely to take the option off the table entirely as their outlook might change if the economy deteriorates.

‘Significantly Weaker’

“I would expect QE3 if the growth or employment data turn significantly weaker,” he said, referring to a third round of quantitative easing.

Coronado said more bond purchases “would require at least a softening in the data,” and that “a moderation in the pace of hiring combined with lackluster activity could do the trick.”

“A pickup in global financial-market tensions could also help tip the scales,” she said.

The Standard & Poor’s 500 Index increased 0.3 percent to 1,397.11 yesterday, bringing the gain for this year to 11 percent. The yield on the 10-year Treasury note dropped to 2.23 percent from 2.28 percent the day before.

Federal Reserve Bank of New York President William C. Dudley stopped short of voicing an opinion on the option of new bond-buying in a March 19 speech. “Nothing has been decided,” he said, adding that while economic reports have improved, it’s “far too soon to conclude that we are out of the woods.”

As president of the New York Fed, Dudley holds a permanent vote on monetary-policy decisions. The other Fed presidents rotate voting on policy this year. Atlanta’s Lockhart holds a vote this year, while Bullard votes next year.

Only Chicago Fed President Charles Evans has favored new stimulus in recent speeches.

“Clearly, more accommodation would be appropriate” because currently “the unemployment rate is substantially above reasonable measures of the natural rate,” Evans said in a March 22 speech in Washington.

-- With assistance from Steve Matthews in Atlanta. Editors: James Tyson, Christopher Wellisz

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Jeff Kearns in Washington at jkearns3@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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