Fed Officials Differ on Need to Keep Rates Low to 2014
Federal Reserve officials widened a rift over a commitment to keep rates near zero through late 2014 as an unexpected increase in claims for jobless benefits added to evidence of a weakening labor market.
William C. Dudley, president of the New York Fed, and Vice Chairman Janet Yellen said the 2014 time-frame is needed to lower unemployment from 8.2 percent. Minneapolis Fed President Narayana Kocherlakota said rising inflation may prompt an interest-rate increase as early as this year, while Philadelphia’s Charles Plosser said policy should hinge on economic performance, not a calendar commitment.
Central bankers next meet in two weeks to consider policy for an economy that Dudley and Yellen said may be sapped by cuts in government spending and the European debt crisis. Dudley and Yellen backed Chairman Ben S. Bernanke’s view that progress in reducing joblessness may not be sustained as growth cools.
“There is a debate going on, but right now the power rests with the chairman and governors” favoring the 2014 rate outlook, said Joseph Lavorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. Even so, the comments suggest “the Fed does not feel it has to take additional easing,” he said.
Atlanta Fed President Dennis Lockhart and the St. Louis Fed’s James Bullard have expressed skepticism in recent days over the need for more easing. Lockhart is a voting member of the Federal Open Market Committee this year, while Bullard, Plosser and Kocherlakota are not. Dudley has a permanent vote and serves as vice chairman of the FOMC.
Some investors, including Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., are betting that the Fed will embark on a third round of large- scale asset purchases. In its first two rounds, the Fed bought $2.3 trillion of bonds from December 2008 to June to avert deflation and spur growth.
U.S. stocks rose yesterday, giving the Standard & Poor’s 500 Index (SPX) its biggest two-day rally in 2012, after Yellen and Dudley spoke. Both officials hold permanent votes on policy. The S&P 500 advanced 1.4 percent to 1,387.57.
Jobless claims increased 13,000 in the week ended April 7 to 380,000, the highest since Jan. 28, data from the Labor Department showed yesterday. The median forecast in a Bloomberg News survey called for 355,000 claims.
The Fed is likely to miss its goals to achieve maximum employment over the next several years, though there is uncertainty about the outlook, Yellen said. “I consider a highly accommodative policy stance to be appropriate,” she said April 11 in a speech in New York.
The end of the so-called Operation Twist program in June won’t amount to a tightening of monetary policy because the level of accommodation is dependent on the amount of assets the Fed holds, she said. The Fed announced in September it would replace $400 billion of short-term debt with longer-term securities to reduce borrowing costs.
Still, the Fed is “quite willing and committed to take whatever actions are necessary” to achieve its goals, she said.
“I haven’t seen any set of information that should suggest to me we should change that view” Dudley said yesterday in Syracuse, New York, referring to the 2014 time horizon for low rates.
Dudley, in a speech to business leaders, said recent “upbeat” data on the U.S. economy suggest that “the recovery may be getting better established.” Still, “it is still too soon to conclude that we are out of the woods, as underlined by the March labor-market release.”
U.S. employers added 120,000 jobs in March, less than the most pessimistic estimate in a Bloomberg News survey of economists. Joblessness fell to 8.2 percent from 8.3 percent as people stopped looking for work. The rate has fallen from 9.1 percent in August.
Inflation will probably rise above the central bank’s 2 percent target next year, contributing to a need for tightening in central bank policy, Kocherlakota said.
“My own belief is that we will need to initiate our somewhat lengthy exit strategy sometime in the next six to nine months or so, and that conditions will warrant raising rates sometime in 2013 or, possibly, late 2012,” he said.
The Fed should aim to follow a “systemic” policy rule whereby changes in the economy prompt predictable responses from the central bank, Plosser said.
“The committee’s description of how policy will be conducted is not entirely clear,” he said to the National Economists Club in Washington.
The Fed said in its Beige Book report on April 11 that the economy expanded “at a modest to moderate pace” from mid- February through late March as manufacturing, hiring and retail sales showed signs of strength in the face of higher fuel prices.
“Some economic news has been encouraging and may be suggesting that the pace of the recovery is picking up,” Raskin said. “Even though general economic activity and labor-market conditions have improved modestly in the past two and a half years or so, house prices have continued to trend down.”
Other policy makers have signaled resistance to further easing. The Atlanta Fed’s Lockhart said on April 11 that the March jobs report doesn’t alter his view that the economy is growing moderately, and he would be “reticent” to support additional purchases of assets by the central bank.
“I am still not convinced that another round in this time frame would achieve a great deal,” Lockhart said to reporters in Stone Mountain, Georgia.
The St. Louis Fed’s Bullard said the economy will probably grow by 3 percent this year and the unemployment rate may drop to 7.8 percent by year-end. Speaking in a Bloomberg Radio interview, Bullard said he “wouldn’t go too far” with last week’s “mediocre” jobs report.
San Francisco Fed President John Williams said April 4 that the “probability of needing to do additional stimulus is lower.”
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