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Fed Presidents Differ Over Need for More Accommodation

Two Federal Reserve regional bank presidents signaled support for more easing while another official warned that withdrawing the current record stimulus may be difficult, highlighting differences among policy makers less than two weeks before they plan to meet.

“Monetary policy if anything is too tight,” Minneapolis Fed President Narayana Kocherlakota said at a panel discussion today in Chicago. 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,” Philadelphia’s Charles Plosser said at the same University of Chicago event.

Fed policy makers are considering whether to expand the central bank’s third round of asset purchases, a move some officials have said would help offset the expiration of the central bank’s Operation Twist program that’s set to expire this month. The policy-setting Federal Open Market Committee has injected an unprecedented amount of stimulus into the economy as it seeks to bolster growth and lower unemployment.

“More accommodation would help lead to better economic outcomes,” Chicago Fed President Charles Evans said during the panel.

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.

Sow Confusion

Plosser said today he is worried such an approach would “sow more confusion in fact than clarity.” Also, monetary policy may not have the power to achieve a certain target for 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.

The FOMC is scheduled to meet Dec. 11-12 in the final gathering before the expiration of the program to extend the average maturity of its bond holdings known as 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.

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.

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