U.S. Federal Reserve officials on Wednesday offered differing views on whether the U.S. central bank should do more to support the economy and what impact more easing could have.
Boston Federal Reserve Bank President Eric Rosengren, speaking in New York, made the strongest argument so far by a Fed official for more monetary easing after the U.S. central bank last week opened the door to the possibility.
Philadelphia Federal Reserve Bank President Charles Plosser, for his part, said he currently did not support further quantitative easing — purchases of bonds — as he does not see a risk of deflation.
A third official, Minneapolis Fed President Narayana Kocherlakota, suggested he would only be a reluctant backer of more easing, saying further purchases of U.S. government bonds may do little to speed up a slower-than-expected recovery.
The Fed, which has already pressed overnight interest rates close to zero and snapped up $1.7 trillion in longer-term debt to drive other borrowing costs lower, said last week that it was prepared to provide the economy more stimulus if needed.
Many analysts expect the central bank to launch a further round of asset buying at its next meeting on Nov. 2-3.
Expectations for further quantitative easing have driven the U.S. dollar to eight-month lows against a broad basket of currencies. The value of currencies in emerging economies have risen as investors seek higher returns elsewhere.
“Current economic conditions — an unemployment rate near 10 percent, sluggish growth, and undesirably low inflation — together constitute a serious economic problem,” Rosengren said.
In a speech titled “How should monetary policy respond to a slow recovery?,” Rosengren said his answer was “vigorously, creatively, thoughtfully, and persistently, as long as we have options at our disposal. And we do have options.”
The Boston Fed chief disagreed with the argument made by Plosser that a key part of the jobless problem is a mismatch between workers’ skills and jobs available which monetary policy is not best placed to address.
“Jobs mismatches are not the primary problem,” Rosengren said. Instead, he said, businesses are holding back hiring because they are not seeing enough demand for their products.
He said the economy is growing too slowly to significantly reduce unemployment rate and stem disinflationary pressures.
Rosengren, who has a vote on the central bank’s policy-setting panel this year, is considered one of the more ”dovish” Fed officials. Atlanta Fed President Dennis Lockhart, who is seen as a centrist but who won’t rotate into a voting slot until 2012, said Tuesday that he had yet to make up his mind on whether more easing was needed.
ASSET BUYING EFFECTIVENESS QUESTIONED
Plosser and Kocherlakota, who move into voting seats next year, are seen on the more inflation-focused, or “hawkish” side of the U.S. monetary policy debate.
Kocherlakota said the main economic effect that a new round of quantitative easing would have is signaling to markets the Fed’s commitment to keeping rates lower for longer. But its ability to bring long-term rates closer to near-zero short-term rates would be more “muted” than earlier efforts, he said.
Still, he said he had lowered his outlook for growth next year to 2.5 percent from his 3 percent forecast last month and called the unemployment situation “deeply troubling.”
Plosser said he does not see a significant risk of sustained deflation, but if deflationary expectations were to materialize he would back asset buying to raise inflation expectations.
“Asset purchases in our current economic environment can do little if anything to speed up the return to full employment,” he said. “Because I see little gain at this point, and some costs, I would prefer not to engage in further asset purchases at this time.”
Rosengren said a challenge of unconventional policies is that the benefits are harder to track than the costs.
While he said the Fed must try to weigh both benefits and costs, he added: “We cannot take lightly how far off the mark unemployment and inflation seem to be.”
