Federal Reserve officials, taken aback by stinging criticism of their decision to print money and buy $600 billion in Treasury bonds, are counterpunching to defend themselves and, in some cases, to reinforce their commitment to the policy.
Charles Evans, president of the Federal Reserve Bank of Chicago and a strong supporter of the Fed’s easing policy, noted in an interview with The Wall Street Journal that the weak economy and low inflation warrants the Fed’s policy and that more such purchases might be needed in the months ahead if the economic outlook doesn’t turn.
“I would continue to want to apply accommodative monetary policy until I had some confidence that that situation was changing,” Evans said, noting that $600 billion is a “good place to start” the easing program.
Eric Rosengren, president of the Federal Reserve Bank of Boston and another strong supporter of the easy money policy, echoed those comments: “As long as the economic outlook doesn’t improve dramatically I would expect that we will purchase the entire amount,” he said, adding, “if the economy were to weaken and we were to get further disinflation and a higher unemployment rate, then we would have to reflect on whether we should take additional action.” Disinflation is a decline in inflation.
Their comments came after top Fed officials, including Vice Chairwoman Janet Yellen and New York Fed President Bill Dudley, in earlier interviews with The Wall Street Journal, New York Times and CNBC, defended the Fed’s policy as a needed step for the U.S. economy.
After months of fractious internal debate, the Fed is now in a highly uncomfortable spot. Several officials, including Fed governor Kevin Warsh, Richmond Fed President Jeffrey Lacker and Kansas City Fed President Thomas Hoenig, have in recent days expressed wariness about the program and a willingness to cut it short if there are signs that inflation is picking up too much.
Critics in Congress and abroad complain that the program could stoke inflation or new asset bubbles without doing much to support growth and argue that the Fed should stop. Bond markets, after initially rallying on hopes for the Fed program, have lost some steam. Fundamental disagreements abound about whether commodity-driven inflation or a Japan-like bout of deflation is in store next for the U.S. economy.
The dissonance has helped to cause public confusion about the outlook for the Fed’s policy and might have contributed to a selloff in bond and stock markets. Investors listen carefully for clues about what the Fed might do next, and those clues are especially hard to read now.
Pramod Bhasin, chief executive of outsourcing firm Genpact Ltd., said he supports the Fed program but that it has communicated its policy “badly” and needed to be clearer about what it was trying to accomplish and how long it will continue.
Criticism of the central bank mounted Tuesday. Sen. Bob Corker, a Tennessee Republican, joined House Republican Mike Pence of Indiana in calling for the Fed’s mandate to be formally narrowed by Congress to focus solely on inflation and not employment, as it is now required by law to do. Fed Chairman Ben Bernanke met privately with Corker Monday to explain the Fed’s recent actions. Corker said he wanted the Fed to have a “clear and explicit focus” on keeping inflation low. A Fed spokesperson said, “The Federal Reserve is not seeking a change to its statutory mandate,” and added the current mandate “is appropriate.”
Evans noted that a narrowed focus on inflation wouldn’t change his responses to the economy right now. Inflation is now running at about a 1% annual rate and Evans noted the Fed’s objective is 2%. He said he is inclined to continue to ease policy until inflation is moving back toward the 2% objective. “I really take seriously that our inflation mandate is 2%,” he said. “For me we’re about a percentage point away.” He and others worry deflation could come next if inflation gets too low.
Next up in this increasingly cacophonous debate is Bernanke himself, who will speak at a European Central Bank conference in Frankfurt, Germany, on Friday.
German and other foreign officials have attacked the Fed for driving the U.S. dollar lower and stoking commodity price inflation. Bernanke, who is scheduled to speak about global trade imbalances, could point the finger back at countries with big trade surpluses, including Germany itself, and more notably China, for contributing to the global economy’s problems.
Fed and other U.S. officials have been frustrated with the unwillingness of Chinese authorities to allow China’s yuan to appreciate more rapidly in line with its fast-growing economy. Its undervaluation, some Fed officials argue, is now putting pressure on other emerging-market economies to keep their currencies lower than they would otherwise be, which is also stoking inflation.
“It would be advantageous if China were to allow its currency to float more freely,” Rosengren said.