BLOOMINGTON, Minn Federal Reserve Bank policy makers gave differing views on Thursday on whether a renewed round of Treasury debt purchases -- seen as all but certain by market participants -- would be effective in spurring economic recovery.
The president of the Minneapolis Fed, Narayana Kocherlakota, who has been cool to the idea of further Fed monetary policy easing, stopped short of joining some of his colleagues in firm opposition. But he repeated his view that weighing the costs and benefits is a difficult "calculus," and said the effects would likely be "muted."
Boston Federal Reserve Bank President Eric Rosengren saw different risks in undertaking a renewed round of monetary policy easing, warnings that the United States should not repeat Japan's overly meek approach to deflation.
"They also did quantitative easing, but they did it very gradually," Rosengren said in an interview with CNBC television. "What this highlights is we may not want to do it nearly as gradually."
Fed Chairman Ben Bernanke is expected on Friday to lay out options for supporting the tepid U.S. recovery in an address to a conference at the Boston Fed.
The U.S. central bank has kept benchmark U.S. interest rates near zero since December 2008 and has bought $1.7 trillion in mortgage-backed securities and Treasuries to help pull the economy out of its worst recession in decades.
U.S. growth slowed over the summer, and the unemployment rate has been stuck near 10 percent. Economists see little chance the unemployment rate will move lower any time soon, sparking concern that already low inflation could drop further as households hoard cash.
The Fed is widely expected to move to drive down interest rates further with a new round of Treasury purchases, known as quantitative easing. Most economists and analysts polled by Reuters recently have said they expect the Fed to announce new measures at the close of its next policy meeting on November 3.
Kocherlakota, who will rotate into a voting seat on the Fed's policy-making committee next year, said one way quantitative easing could work would be to raise inflation expectations.
"How can we influence real yields if we can't lower our nominal interest rate?" he said. "The other way to do it is to try to raise inflation expectations."
Kocherlakota repeated his view that the first round of quantitative easing, undertaken at the height of the financial crisis, reduced the term premium -- the difference in yields not explained by the expected path of short-term interest rates -- on benchmark 10-year Treasury notes relative to two-year notes by about 0.4 to 0.8 percentage point.
"My own guess is that further uses of QE would have a more muted effect on Treasury term premia" because markets are functioning much better now than in early 2009, he said.
The president of the Kansas City Fed, Thomas Hoenig, who is one of the Fed's most consistent hawks on the threat of inflation, on Tuesday said that further monetary policy easing would do little to aid recovery and could spark inflation.
While calling the unemployment situation "disturbing," Kocherlakota said he expects the current modest recovery to continue and inflation to tick back up to a more desirable 1.5 to 2 percent in the second half of next year.
That would put inflation close to the "tight range around 2 percent," which Kocherlakota said is seen as defining the Fed's price stability mandate.
Low inflation is considered worrisome because of fears that it could tip into deflation, a vicious cycle of a downward spiral in prices and the economy. It could also make debt harder to repay.
Asked how severe the threat of deflation was, Rosengren said even the current trend of disinflation represented an unwarranted tightening of economic conditions.
"It's a low-probability event that we have deflation, but we don't even want disinflation," he said.
While the Fed's other mandate is to support maximum employment, Kocherlakota said the exact level is a "moving target" because of factors like demographics and taxes that are beyond the Fed's control.