Fed Presidents Clash Over Need to Provide More Stimulus
Federal Reserve regional bank presidents voiced opposing views over whether the central bank should step up record accommodation following the lowest monthly increase in U.S. payrolls in a year.
Chicago Fed President Charles Evans said in a speech in New York yesterday that “soft” U.S. economic data call for “extremely strong accommodation,” while Richard Fisher of Dallas said more easing through Fed purchases of bonds would be “pushing on a string.” James Bullard of St. Louis said there’s time to assess the economy and a policy change isn’t needed now.
After policy makers met in April, Chairman Ben S. Bernanke said the central bank may ease further should unemployment fail to make “sufficient progress towards its longer-run normal level.” Unemployment in May rose to 8.2 percent from 8.1 percent the prior month, and job growth slowed to 69,000, compared with 275,000 in January.
Vice Chairman Janet Yellen will have an opportunity in a speech tonight in Boston to signal whether she believes the Fed should try to spur the expansion and revive the job market by easing at its June 19-20 meeting. Bernanke plans to testify tomorrow about the economic outlook before the Joint Economic Committee in Washington.
“Finding a way to deliver more accommodation -- whether it is monetary or fiscal -- is particularly important now because delays in reducing unemployment are costly,” Evans said. “Failure to act aggressively now will lower the capacity of the economy for many years to come.”
Evans, one of the Fed’s most vocal supporters of more easing, reiterated his view that the central bank should communicate it won’t raise interest rates until either unemployment falls below 7 percent or inflation increases above 3 percent over “the medium term.”
“The economic conditionality in my 7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low,” Evans said. “I would indicate that steady progress toward stronger growth is essential, and I would be willing to buy mortgage-backed securities to do so.”
The Fed has kept its benchmark interest rate near zero since December 2008 and purchased $2.3 trillion of securities, including Treasuries and housing debt, in two rounds of large- scale asset purchases.
The U.S. economy is expanding at a “moderate” pace that isn’t fast enough to bring a “meaningful” reduction in unemployment, Evans said to reporters after his speech.
Evans, who like Bullard doesn’t vote on monetary policy this year, said he’s “generally been willing to go along with pretty much anything that smacked of” additional monetary stimulus. “One mistake I don’t want to be nailed with is: didn’t try hard enough.”
The Chicago Fed chief said he isn’t worried about inflation rising “above reasonable tolerance levels for” the Fed’s 2 percent objective in part because “wage pressures are anemic.”
Low Treasury yields also bolster the view that the economy will continue to grow at a modest pace with low inflation, he said. Yields on the benchmark 10-year note yesterday rose five basis, or 0.05 percentage point, to 1.57 percent after falling as much as two basis points to 1.51 percent, according to Bloomberg Bond Trader prices.
“With inflation near target, relatively moderate economic growth expected for several more years, potential productive capacity at risk, and a symmetric 2 percent inflation target, we should resist the sirens’ call to prematurely raise rates or tighten our policy in any way,” Evans said in his speech.
Aid for Economy
Fisher said further bond purchases, known as quantitative easing, would do little to aid the economy while prompting perceptions the Fed is encouraging government spending.
“Were we to go down the path to further accommodation at this juncture, we would not simply be pushing on a string but would be viewed as an accomplice to the mischief that has become synonymous with Washington,” Fisher said in a speech at the University of St. Andrews in Scotland.
Bullard said yesterday in St. Louis that the recent payroll data hasn’t changed the economic outlook and the Fed should be careful not to prompt borrowing by consumers with excessive debt.
“One possible FOMC strategy is to simply pocket the lower yields and continue to wait and see on the U.S. economic outlook,” Bullard said.
“Monetary policy has been ultra-easy during this period, but cannot reasonably encourage additional borrowing by households with too much debt,” Bullard said. “The recent nonfarm payrolls report was disappointing, but not enough to substantially alter the contours of the U.S. outlook.”
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