Two Federal Reserve policy makers differed over the central bank’s ability to boost growth, with one calling for more action to fight a “massive” shortfall in employment and the other saying further steps would probably serve only to stoke inflation.
“If we sit on our hands as the economy withers relative to our mandate, then we could take a huge hit to our credibility,” said Charles Evans, head of the Chicago Fed, invoking the damage to the central bank’s reputation during the Great Depression. The Richmond Fed’s Jeffrey Lacker said there’s little more the Fed can do because “the strength of this recovery is going to be relatively independent of our monetary policy choices.”
The contrasting views reflect the depth of disagreement on the policy-making Federal Open Market Committee as Fed Chairman Ben S. Bernanke leads efforts to reduce an unemployment rate stuck near 9 percent two years after the end of the recession. The last two decisions to ease policy drew three dissents, the most opposition in almost 19 years.
The two policy makers, in separate speeches yesterday, offered contrasting views of Fed moves so far. “I believe we have done the right thing,” Evans said in a speech in Detroit. Lacker, speaking in Salisbury, Maryland, said he disagreed with the Fed’s decision last month to lengthen the maturities of the bonds in its portfolio in a bid to lower long-term interest rates.
The level of disagreement among policy makers is “no cause for alarm,” Lacker said.
“Economists can reach different conclusions, based on legitimate scientific uncertainty about the structure of the economy and current economic conditions,” he said. “In my experience as an FOMC participant since 2004, the Committee has functioned with an exceptional level of collegiality.”
Bernanke is scheduled to speak about Fed policy today at an event held at the Federal Reserve Bank of Boston.
Data released since the Sept. 20-21 meeting show American employers added 103,000 jobs in September, easing concern the economy is tipping into another recession. Retail sales in September rose by the most in seven months, according to Commerce Department figures.
By contrast, confidence among consumers unexpectedly dropped this month and purchases of new homes declined to a six-month low in August.
The Standard & Poor’s 500 Index slid 1.9 percent to 1,200.86 at the close in New York yesterday, while the yield on the 10-year Treasury note declined nine basis points to 2.16 percent. A basis point is 0.01 percentage point.
Tolerate Higher Inflation
Evans, unlike most of his Fed colleagues, has repeatedly stated a willingness to tolerate higher inflation as long as it pushes down the jobless level. The Chicago Fed president said the central bank might want to also consider “reevaluating” its progress toward policy goals at each FOMC meeting, along with the rate of asset purchases.
Minutes of the FOMC’s September gathering said a number of participants saw large-scale asset purchases as “potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted.”
Most FOMC participants favored providing the public with more information on the central bank’s goals and how those objectives influence the Fed’s decisions, according to minutes of the meeting, released on Oct. 12.
Fed officials also “saw advantages” to tying the Fed’s near-zero interest rates to more specific changes in the economy, according to the meeting minutes.
Cut Borrowing Costs
The committee decided at last month’s gathering to replace $400 billion of Treasuries in the central bank’s portfolio with longer-term debt to reduce borrowing costs. Three officials dissented. Policy makers also chose to reinvest maturing housing debt into mortgage-backed securities, partly to keep the Fed’s Treasury holdings from getting too large.
The Fed’s so-called “Operation Twist” plan is a “very important” way of demonstrating a willingness to be accommodative, without expanding the central bank’s balance sheet, Evans, 53, said at a dinner held by the Michigan Council on Economic Education. “If it’s not doing enough, we need to do more.”
By contrast, Lacker, appearing at the Salisbury-Wicomico Economic Development Annual Meeting, said the “factors likely to be restraining growth -- from empty houses to prospective tax rates -- are nonmonetary and largely beyond the power of the central bank to offset through easier monetary conditions.”
“History has repeatedly demonstrated that if a central bank attempts to add monetary stimulus to offset nonmonetary disturbances to growth, the result is higher inflation,” the Richmond Fed chief said.
Lacker’s opposition to further monetary easing aligns him with Minneapolis Fed President Narayana Kocherlakota, Richard Fisher of Dallas and Charles Plosser of Philadelphia, who dissented from the decision to launch Operation Twist.
Lacker, 56, is a former head of research at the Richmond Fed and oversees a district that is home to the biggest U.S. lender by assets, Bank of America Corp., based in Charlotte, North Carolina. He became president of the Richmond Fed in August 2004.
Evans has led the Chicago Fed since September 2007 and is one of only two regional Fed presidents who vote on the FOMC every other year, along with Sandra Pianalto, president of the Cleveland Fed.
The regional bank chief has been among the FOMC’s strongest supporters of monetary stimulus since last year.