Fed officials at odds over policy path
LAKE FOREST, Illinois
LAKE FOREST, Illinois (Reuters) - Top Federal Reserve officials disagreed on Wednesday over how aggressive the central bank should be to spur faster growth and bring a lofty jobless rate down more quickly.
Chicago Fed President Charles Evans said he favors the Fed strengthening its commitment to holding interest rates near zero by adopting specific thresholds that unemployment and inflation must hit before interest rates could go up.
"The data are not strong enough, or uniform enough, to assert that momentum for growth is building," he said, suggesting that he would favor keeping benchmark rates on hold at least through the mid-2013 date already set.
But Philadelphia Fed President Charles Plosser said rates may need to rise sooner than that. He expressed concern that although inflation has moderated it remains above levels forecast for 2011 and that policymakers need to be ready to remove easy money policies.
"Inflation most often develops gradually, and if monetary policy waits too long to respond, it can be very costly to correct," he said. "We need to proceed with caution as to the degree of monetary accommodation we supply to the economy."
The two officials represent opposing extremes of the debate at the Fed over how much medicine the economy needs to solidify its recovery from a deep recession that ended two-and-a-half years ago.
Signs that recovery in the economy gathered steam in the final months of 2011 has investors questioning whether the Fed will take additional steps to support growth, such as buying more bonds in a strategy known as quantitative easing. In its Beige Book anecdotal review of economic conditions, the Fed said growth is expanding moderately but a weak jobs market is holding back income growth, needed to support expansion.
The central bank next meets to discuss monetary policy on January 24-25, where it is expected to begin making public more details about its economic forecasts and goals as a way to cement expectations that policymakers will keep rates low until the recovery is more robust.
Evans and Plosser represent the two extremes of Fed policymaker views on monetary policy, and officials are expected to keep more aggressive steps in reserve in case the recovery wobbles.
INFLATION DEBATE RAGES
The Fed is due to being publishing detailed forecasts for the path of the benchmark federal funds rate in coming years at the January meeting. It is also expected to move closer to committing to an explicit inflation target.
Those steps are viewed as helping cement its promise to hold rates at ultra-low levels through mid-2013 and possibly beyond.
The Fed cut benchmark rates to near zero more than three years ago and has bought $2.3 trillion in bonds to lift growth. Officials are exploring ways to bolster their commitment to a long period of easy money policies and some favor an additional round of bond purchases.
The Fed has recently urged lawmakers and other regulators to consider fixes to problems in housing markets to help ease strains on the broader economy from falling house prices and high rates of foreclosure.
Atlanta Fed Bank President Dennis Lockhart, also speaking on Wednesday, noted that the housing market, which has weighed heavily on the economy, remains depressed. He said housing prices were still falling year over year, suggesting the troubled sector has yet to see a bottom.
Having virtually exhausted conventional tools the Fed has turned to communications initiatives to help strengthen growth. Inflation targeting is one such tool.
Most other central banks publish inflation targets as a way of anchoring inflation expectations, and most Fed officials support an explicit inflation target.
However, Fed officials also disagree on what adopting an explicit inflation target means for monetary policy.
Evans said on Wednesday that setting an inflation target could allow policymakers to temporarily permit inflation to go higher than 2 percent -- the Fed's preferred threshold -- to bring the jobless rate down to an acceptable level.
"Even if inflation runs somewhat above its goal for a while, the public would understand that we intend to bring inflation down to the goal over time," he said.
But St. Louis Fed President James Bullard said on Tuesday the value of an explicit target is precisely that it cements the central bank's inflation-fighting credibility by committing not to let inflation surpass a target level.
"PAINSTAKINGLY SLOW" RECOVERY
Also, since the Fed has a mandate not only to maintain price stability but also to ensure full employment, some officials believe that if the Fed sets inflation targets, it must also provide similar goals for employment.
Evans, for example, advocates making clear the Fed will hold rates low until the jobless rate slips below 7 percent.
However, others disagree.
Jeffrey Lacker, president of the Richmond Fed and an inflation hawk, also touted the benefits of clear communications on Wednesday in an interview with CNBC, but said it would not be appropriate for the Fed to set a numerical target for unemployment.
The U.S. jobless rate fell to a near-three year low of 8.5 percent in December but many analysts believe that number could rise again, and despite the lower rate, employment remains 6.1 million below its pre-recession level.
Evans, who has been one of the most outspoken advocates of Fed action to lower unemployment, said the central bank should stick to its super-easy monetary policy to fight unemployment and spur a "painstakingly slow" economic recovery.
"There is a natural tendency for policymakers to pull back on accommodation too early before the real rate of interest has fallen to low enough levels," he said in an address to a business group. "It is essential that the Fed clearly commit to a policy action that is measurable against our goals."
The risk that Europe's debt crisis could disrupt the U.S. financial system is looming larger, Evans said.
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