The odds of more Federal Reserve stimulus diminished yesterday as four central bankers said it probably won’t be needed and an unexpected acceleration in U.S. manufacturing provided fresh evidence of economic strength.
John Williams, president of the San Francisco Fed, joined his counterparts from Richmond, Philadelphia and Atlanta in casting doubt on the need for additional purchases of bonds to push down longer-term interest rates. Three of them are voting members of the rate-setting Federal Open Market Committee.
Thresholds for further action “would be if we see economic growth slow to the point where we’re not seeing further progress in bringing the unemployment rate down,” Williams said, or if inflation dropped “significantly” below the Fed’s 2 percent goal. Those aren’t “the circumstances I currently expect,” Williams said at a conference in Beverly Hills, California.
The FOMC left policy unchanged after its April 24-25 meeting, and Chairman Ben S. Bernanke signaled that further easing is unlikely unless the economy unexpectedly deteriorates. Bernanke said it would be “reckless” to pursue policies that would drive up inflation when it’s already near the Fed’s target, while noting he’s “prepared to do more” should conditions worsen.
Richmond President Jeffrey Lacker, who has dissented three times this year against the panel’s statement that borrowing costs are likely to stay “exceptionally low” at least through late 2014, repeated his objections yesterday.
“For us to provide more monetary stimulus at this point would likely raise inflation risks and not likely do much for growth,” Lacker said in an interview at the Bloomberg Washington Summit hosted by Bloomberg Link. While “it’s not a gangbusters recovery by historical standards,” growth will accelerate, he said.
Lacker said the central bank needs to be ready to raise the benchmark federal funds rate even if joblessness exceeds 7 percent, and that an interest-rate increase is likely in mid-2013.
Unemployment “could well be above 7 percent, and I think we have to prepare for that,” Lacker said. “I think it’s a misconception to think we have to get unemployment all the way down to five or some number like that before we raise rates.”
Williams, who votes on policy this year, said at the 2012 Milken Institute Global Conference that he expects the economy to grow at a “moderate” pace of 2.5 percent and “pick up somewhat” during the next few years. In March, Williams said the Fed “may need to do more” and had to “keep applying monetary policy stimulus vigorously.”
U.S. stocks retreated today, after the Dow Jones Industrial Average advanced to the highest level since December 2007, as industry data showed that companies added fewer jobs last month than economists projected.
The Dow fell 0.4 percent to 13,227.93 at 11:27 a.m. in New York. Yesterday’s advance was fueled by a report from the Institute for Supply Management showing U.S. manufacturing unexpectedly expanded in April at the fastest pace in 10 months.
The yield on the 10-year Treasury note fell two basis points, or 0.02 percentage point, to 1.92 percent.
A Labor Department report on May 4 is likely to show employers added 160,000 jobs to payrolls in April and the unemployment rate stayed at 8.2 percent, according to the median forecasts in a Bloomberg survey of economists. In March, employers added 120,000 jobs, the fewest since October.
Economic growth slowed to a 2.2 percent annual pace in the first quarter from 3 percent in the final three months of 2011, according to a Commerce Department report last week. While consumer spending increased by the most in more than a year, growth was restrained by a diminished contribution from business inventories and a drop in government spending.
Philadelphia Fed President Charles Plosser, who doesn’t vote on policy this year, also warned of inflation risks yesterday, saying the central bank must be ready to contain accelerating prices.
“With the very accommodative stance of monetary policy that has now been in place for more than three years, we must guard against the medium- and longer-term risks of inflation,” Plosser said in San Diego. He repeated that the Fed may have to raise interest rates “well before” the end of 2014 “in the absence of some shock that derails the recovery.”
Atlanta’s Dennis Lockhart, another voting member of the FOMC, repeated that he’s skeptical of the benefits of further bond purchases. The Fed bought $2.3 trillion of assets in two rounds after cutting its benchmark rate close to zero in December 2008.
Not all Fed officials are in agreement that the central bank should only maintain its current policy stance.
Chicago’s Charles Evans, who doesn’t vote this year, said he doesn’t “see the need” to remove “strong accommodation” until the economy expands at a 4 percent rate for some years.
“I think we’re going to need more of this,” Evans said, also speaking in Beverly Hills.
The Fed hasn’t done enough to describe its tolerance for inflation, and it should be willing to let inflation rise to 3 percent as its 2 percent target is “not a ceiling,” Evans said. “We do allow the possibility” that inflation will top 2 percent, Evans said. “We want a vibrant economy.”
Lockhart, who spoke on the same panel as Evans, disagreed with allowing inflation to rise that high. Prices accelerating at a 3 percent rate or faster make him “pretty nervous,” Lockhart said.