Top Fed officials set table for more easing

Mon Jul 9, 2012 3:39pm EDT

John Williams, president and chief executive of the Federal Reserve Bank of San Francisco, takes part in a panel discussion titled ''U.S. Overview: Is the Recovery Sustainable'' at the Milken Institute Global Conference in Beverly Hills, California May 1, 2012. REUTERS/Danny Moloshok

John Williams, president and chief executive of the Federal Reserve Bank of San Francisco, takes part in a panel discussion titled ''U.S. Overview: Is the Recovery Sustainable'' at the Milken Institute Global Conference in Beverly Hills, California May 1, 2012.

Credit: Reuters/Danny Moloshok

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COEUR D'ALENE, Idaho (Reuters) - Three top Federal Reserve policymakers on Monday laid the groundwork for a third round of bond purchases, saying the U.S. recovery was weak and unemployment far too high.

"We are right at that edge, that if economic data keep coming in below our expectations -- and our view is we are not making progress on our mandates, or we don't expect to make progress on our mandates -- then I think we would need more accommodation," San Francisco Fed President John Williams told reporters after a speech in the resort area of Coeur D'Alene, Idaho.

But, underscoring the divisions at the U.S. central bank, Richmond Fed President Jeffrey Lacker reiterated his opposition to a new round of stimulus in an interview with Bloomberg Radio.

The Fed has kept benchmark short-term interest rates near zero since December 2008 and signaled it would keep them there until at least late 2014 to bolster the economy.

It has undertaken two unprecedented rounds of quantitative easing, buying $2.3 trillion in long-term securities to push down borrowing costs.

Last month, after a stream of disappointing economic news, the Fed slashed its outlook for growth but took only a modest step towards easing policy further, adding six months to its so-called Operation Twist, which aims to lower rates by selling short-term securities and buying long-term ones.

But after a U.S. government report Friday showing employers added fewer jobs than expected in June, economists at top Wall Street firms polled by Reuters put the chance of a new round of policy easing at about 70 percent, up from 50 percent on June 20.

Williams, a voter on the Fed's policy-setting panel this year, said he had cut his growth forecasts for the next year and a half and now expects the jobless rate, currently at 8.2 percent, to stay above 8 percent until the second half of next year.

At the same time, falling commodity prices, a rising dollar, and subdued labor costs will drive inflation to 1.25 percent this year and 1.75 percent next year, below the Fed's 2-percent target.

"My baseline forecast is basically at that point where we are really not making progress over the next year, year and a half on our goals," he said. "In that kind of condition I would say that additional stimulus is needed," and is best done in the form of purchasing housing-backed securities.

Speaking in Bangkok earlier, two of the Fed's most dovish policymakers were even more adamant.

"Additional monetary accommodation is needed to more quickly boost output to its full potential level," Chicago Federal Reserve Bank President Charles Evans told the Sasin Bangkok Forum. "The economic circumstances warrant extremely strong accommodation."

Addressing the same forum, the president of the Boston Federal Reserve, Eric Rosengren, backed that view, saying he saw slower growth and higher unemployment than most of his colleagues.

"So far data has been coming in weak and I gave a weak forecast myself," he told reporters after his speech. "I think it's appropriate to have more quantitative easing."

Neither is a voting member of the Fed's policy-setting panel this year, but both will be in 2013.

At the forum, Rosengren said he thought inflation would only be around 1.2 percent in 2012.

Evans also said wage pressures were virtually non-existent and that inflation was likely to stay at or below the Fed's 2 percent target.

He acknowledged that advocating a policy that risks pushing up inflation, even temporarily, opened him up to charges of central bank "blasphemy."

"I can't tell you how often people look at me in abject horror when I say that we should adopt a conditional policy that tolerates the risk of inflation exceeding our target by as much as 1 percentage point," he said.

But with U.S. unemployment already several percentage points above the level most see as sustainable, the Fed should be willing to tolerate a "modest, transitory rise" in inflation to bring it down, Evans said.

Williams, speaking with reporters, said he also believed that a temporary rise in inflation would not be worrisome, but added that inflation is likely to stay low because growth is slow.

The Fed next meets to discuss policy on July 31 to August 1, and then on September 12 to 13.

Late last week, the central banks of China, the euro zone and Britain eased monetary policy, reflecting growing alarm over the health of the world economy.

All four Fed officials speaking on Monday noted the threat to the U.S. from Europe's crisis, and even Lacker, the policy hawk, said he was not worried about inflation.

But Lacker struck a much more optimistic tone than his colleagues.

"I don't think this is fatal. I don't think this is tipping us into recession right now," he said.

(Additional reporting by Orathai Sriring and Sinsiri Tiwutanond in Bangkok, Pedro da Costa in Washington and Jonathan Spicer in New York; Editing by Phil Berlowitz)

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