Hawk to dove, trio of Fed officials says no to QE3
SANTA BARBARA, California
SANTA BARBARA, California (Reuters) - The expectation that moderate U.S. economic growth will continue to create jobs is feeding optimism among Federal Reserve policymakers that they won't need to resort to a controversial third round of bond buying to stimulate the recovery.
A trio of Fed officials -- San Francisco Fed President John Williams, Atlanta Fed President Dennis Lockhart and Philadelphia Fed President Charles Plosser -- spoke with unaccustomed unity in Santa Barbara on Thursday, summarily rejecting further easing unless the economy takes a turn for the worse.
The unity was all the more striking because the three represented the full policy spectrum at the Fed, from the dovish Williams, considered to be among the most employment-focused of Fed policymakers, to Plosser, one of the Fed's most hawkish members.
The jobless rate, which has come down sharply in recent months, would need to be stuck at above 8 percent, "not just for a few months" to require a third round of quantitative easing, known as QE3, Williams told reporters after the three spoke to a crowd of hundreds in a historic downtown theater.
"Our policy is correctly calibrated," he said. "I'm not in favor of going to QE3 right now."
"I would not find QE3 a good policy choice," Plosser said, adding that a crisis in Europe or a sharp drop in inflation could trigger a change in his view, but that neither event is in his forecast.
"I'm in line with that," said Lockhart, who is considered a moderate dove. More easing is "a real option, but an option to be held in reserve for more serious circumstances than we now face," he said.
The Fed has kept interest rates near zero for more than three years, and has bought $2.3 trillion in long-term securities in an unprecedented drive to spur growth and revive the economy after the worst recession in decades. The bond purchases drew criticism from politicians at home and abroad that the policies could kindle inflation.
Yet the recovery, especially in jobs, has been slow and economic growth has been erratic, leading the central bank to say it expects to keep rates "exceptionally low" at least through late 2014.
Fed Chairman Ben Bernanke has kept the door open to more asset purchases, but has made it clear he does not want inflation, now near its 2-percent target, to rise much more.
SPLIT ON JOB VIEW
Despite their broad agreement on current policy, the three Fed officials speaking on Thursday were far from full agreement on how quickly the jobless rate will fall and where inflation is likely to go, suggesting they may push for very different policies in months to come.
A government report on Friday is expected to show that unemployment stood at 8.2 percent in April, around where it has been for the last two months. Inflation has stayed near the Fed's 2 percent target for the past five years.
Williams on Thursday predicted the jobless rate will only fall to 7 percent by the end of 2014. Plosser predicted 3-percent growth could bring unemployment down to 7 percent by the end of next year, and speaking earlier this week said the Fed may need to raise rates as soon as late this year or early next.
Williams and Lockhart are voting members this year on the Fed's policy-setting panel and both supported the Fed's decision last month to keep its guidance that rates will need to stay low through late 2014. Plosser's next turn to vote will come in 2014.
The divergence in views appeared to stem from conflicting perceptions on the workings of the labor market.
Williams and Lockhart blamed less-than-blistering growth and sluggish demand for restrained job growth, playing down the impact of structural changes like mismatches between employer needs and worker skills that can arise when technology changes rapidly.
Both said they believe the current unemployment rate is well above normal levels, and see inflation staying low as a result.
Plosser argued the labor market is shaped by "a huge number" of factors beyond the central bank's control, including technological innovations and tax policy, which make it impossible to guess how much farther the jobless rate can fall before inflation pressures start to emerge.
Plosser predicted inflation could rise a bit above the Fed's 2 percent target over the next two years.
Plosser noted that only four of his fellow policymakers now believe the Fed should first hike rates after 2014, versus six in January. He said such changes in the central bank's statement of economic projections, or SEP, are important clues to future policy.
"It is possible that the maximum employment and price stability parts of the Fed's mandate could be in conflict," he said. "I suggest that the public watch the assessments of the appropriate policy as viewed by policymakers in the SEP as an important source of information in this regard."
The Fed releases its policy projections quarterly.
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