WRAPUP 1-Two Fed officials favor aggressive easing options

Sat Oct 16, 2010 1:35pm EDT

* Evans says economy needs much more policy support

* Rosengren: Should aggressively counter deflation threats

* Evans says Fed should consider price-level targeting

* Rosengren votes this year, Evans next year on Fed policy

By Kristina Cooke

BOSTON, Oct 16 (Reuters) - Two top Federal Reserve officials argued for further aggressive action by the central bank, with one saying the economy needs "much more" help and the other pointing to Japan's painful lessons.

With nearly one in ten in the U.S. labor force unable to find work and already very low inflation threatening to drop further, the U.S. central bank is expected to offer the economy more support at its next policy meeting on Nov. 2-3.

Most analysts expect the Fed will embark on a fresh round of Treasury purchases, over and above the $1.7 trillion in longer-term assets it has already bought.

"In my opinion, much more policy accommodation is appropriate today," Chicago Federal Reserve Bank President Charles Evans told a conference hosted by the Boston Fed, repeating an argument he made earlier this month.

Boston Fed President Eric Rosengren, speaking at the same event, said Japan's drawn-out battle with deflation shows prevention may be easier than the cure, and policymakers should respond aggressively before "pernicious" deflation takes hold.

"Insuring against the risk of deflation may be much cheaper than waiting until it has occurred and then trying to address it," said Rosengren, who has a darker view of the economic outlook than some of his colleagues at the central bank.

"A gradual response may not be as effective as a more active response to arrest deflationary pressures before they become embedded in thinking that can affect household and business spending," he said.

U.S. inflation unexpectedly slowed in September even as retail sales picked up, keeping pressure on the Fed to act soon to lessen the risk of a downward price spiral. [ID:nN15191048]

Record low interest rates in rich countries, and the prospect of the Fed pumping more dollars into the economy, are funneling huge capital flows into high-yielding emerging markets, pushing up their currencies. The resulting currency tensions are expected to be a live issue at meetings of the world's top finance officials in South Korea next week.

Rosengren and Evans' recent remarks put them squarely in the camp that says monetary policy can and should do more to support the economy.

Fed Chairman Ben Bernanke, speaking on Friday, appeared to be sympathetic to their views as he gave his most explicit signal yet that more easing is on the horizon.

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To see where officials stand along the hawk/dove spectrum:

link.reuters.com/ryv97p or [ID:nN01107830]

For more stories on Fed policy, see [FED/AHEAD]

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HORRIBLY CYNICAL?

Evans fleshed out his argument that the Fed should consider temporarily aiming for higher inflation to make up for below-target inflation now, as well as strengthening its commitment to keeping rates low.

Evans said price-level targeting could be a useful complement to the Fed's other strategies in an environment in which households and businesses are so cautious about the future that they save more than they invest, despite very easy monetary policy.

The Fed has an informal inflation target of 1.7 to 2 percent. For the 12 months through August the core personal consumption expenditure price index, USPCE2=ECI the Fed's preferred inflation gauge, was running at 1.4 percent.

New York Fed President William Dudley also suggested earlier this month that price-level targeting could help the Fed achieve its goals more quickly.

Evans said fears that the policy would be difficult to communicate to the public may be overblown.

"My personal viewpoint is that it is horribly cynical to think that good communication is beyond our ability, especially if that is the best policy," said Evans, who will rotate into a voting role on the Fed's policy-setting panel next year.

Rosengren, who has a vote on policy this year, said the first round of Fed asset purchases was effective in bringing down long-term interest rates, adding that purchases may also work by signaling rates will stay low.

He added any asset purchase program should be flexible.

"The scale of the program should be sensitive to the prevailing conditions, and the size of the program would need to vary to accomplish a particular interest rate outcome," he said. (Additional reporting by Ann Saphir in Chicago; Editing by Padraic Cassidy)

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Comments (60)
BackwardsBoy wrote:
What is needed instead of an inflationary policy (which will significantly harm the millions of baby-bomers now on fixed incomes) is one of drastically reduced governmental interference in the market. We need a moratorium on any new taxes or regulations for at least two years, followed by a government-wide reassessment of every regulation, especially environmental regs.

We need a national policy that encourages cheap energy to stimulate new oil exploration and development, along with new power plant construction, both nuclear and clean coal. We are rich in natural resources, but the environmental groups and our own EPA are holding the country hostage to their radical leftist ideology and must be stopped.

There is nothing wrong with our economy that common sense cannot cure. Ours is the world’s strongest economy, but artifical restrictions are being placed upon it by politicians who do not understand free market principles. Aggressive growth can and should be the priority of Washington at this time. Anything less proves that our government is out of control.

Oct 16, 2010 6:11pm EDT  --  Report as abuse
kbworkman wrote:
Right! Inflation will really stimulate the economy.

These idiots rail against the rich but they are all rich.

Learn about the world of those who are not rich. When the prices go up those of us who aren’t rich spend less. We keep our money for when we really need something.

Raising the prices doesn’t stimulate the economy.

Idiots.

Oct 16, 2010 6:13pm EDT  --  Report as abuse
Robf wrote:
Have they given a bit of thought to raising interest rates back up to 1.5 %, currently banks have no reason to loan money. Borrow from the fed at 0 turn around and by 10 year treasury bonds at 2.5 %, they make a spread of 0f gross 2.5. I would do the same if i could why risk the money in a shaky market. Raise the rate and boom they have to loan to make money very simple. This will spur growth.

Oct 16, 2010 6:21pm EDT  --  Report as abuse
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