Fed Presidents Back More Stimuls as End to Twist Looms

Two Federal Reserve regional bank presidents backed additional accommodation to bring down 7.9 percent unemployment with the planned expiration later this month of an easing program known as Operation Twist.

“Monetary policy if anything is too tight,” Minneapolis Fed President Narayana Kocherlakota said at a panel discussion yesterday in Chicago. “More accommodation would help lead to better economic outcomes,” Chicago Fed President Charles Evans said during the panel at the University of Chicago.

Policy makers are considering whether to expand the Fed’s third round of asset purchases, a move some officials have said would help offset the end of Operation Twist, in which the Fed each month swaps $45 billion of short-term Treasuries for longer-term debt. The Federal Open Market Committee has injected an unprecedented amount of stimulus into the economy as it seeks to bolster growth and lower unemployment.

Philadelphia Fed President Charles Plosser, also speaking on the panel, warned of the risks from stepping up stimulus.

It may be “very difficult for us to reverse course” and “we also have to worry about the future and the consequences of our policies further down the road,” he said.

Regional Fed presidents vote on monetary policy on a rotating basis, and neither Evans, Kocherlakota nor Plosser is a voting member on the FOMC this year.

Monthly Purchases

San Francisco Fed President John Williams said in November the central bank will probably buy about $85 billion in bonds each month starting in early 2013 and continue purchasing securities well into the second half of the year. He is a voting member of the FOMC this year.

Fed officials are also debating whether to link the increase of the main interest rate to an economic measure such as unemployment rather than commit to hold borrowing costs near zero for a set period of time. Evans and Kocherlakota have endorsed such a change, as have Vice Chairman Janet Yellen and Boston Fed President Eric Rosengren.

Plosser said yesterday he is worried such an approach would “sow more confusion in fact than clarity.”

Also, “it’s not clear at all to me that policy has the capability to achieve these targets” for measures such as unemployment, he said.

Evans on the other hand said Japan’s struggle with more than a decade of deflation is of “great concern” to him.

“One of the things I worry about is the possibility that the U.S. turns into a Japanese experience where we have extremely weak modest growth over a long period of time,” he said.

Next Year

The FOMC is scheduled to meet Dec. 11-12 in the final gathering before the expiration of Operation Twist. A “number” of officials said at the October meeting that the Fed next year may need to expand its monthly purchases of bonds, according to the minutes.

Recent data point to signs that mortgage rates, driven to all-time lows by the Fed’s bond purchases, are boosting the housing market and the broader economy.

The S&P/Case-Shiller index of home prices in 20 cities rose 3 percent in September from a year earlier, the biggest year-to-year gain since July 2010. Housing starts rose in October to a 894,000 annual rate, the fastest since July 2008.

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