Mixed endorsements of more Fed easing

NEW YORK/SAN FRANCISCO Mon Aug 27, 2012 3:56pm EDT

Chicago Federal Reserve Bank President Charles Evans speaks during the Sasin Bangkok Forum July 9, 2012. REUTERS/Sukree Sukplang

Chicago Federal Reserve Bank President Charles Evans speaks during the Sasin Bangkok Forum July 9, 2012.

Credit: Reuters/Sukree Sukplang

NEW YORK/SAN FRANCISCO (Reuters) - Two top Federal Reserve officials offered widely different endorsements of more U.S. policy easing on Monday, with one weighing the benefits and risks of more action and the other stressing the need to act now.

Cleveland Fed President Sandra Pianalto and Charles Evans of the Chicago Fed bank, however, largely stuck to their previous stances, offering little insight into whether the U.S. central bank will ultimately do more to help the recovery.

With economic growth slow and unemployment high, economists see a decent chance that the Fed could launch a third round of asset buying, known as quantitative easing (QE3), when it meets next month.

But there are both benefits and limits to such a move, said Pianalto, a voter this year on the Fed's policy committee. "I am supportive of actions that provide economic benefits with manageable risks," she told a business audience in Newark, Ohio.

"Monetary policy should do what it can to support the recovery, but there are limits to what monetary policy can accomplish," Pianalto added.

While Pianalto is considered a centrist in the spectrum of Fed policymakers, Evans is firmly on the "dovish" wing, pushing for more action immediately to bring down the 8.3 percent jobless rate.

"I don't think we should be in a mode where we are waiting to see what the next few data releases bring," Evans told a seminar at the Hong Kong Bankers Club. "We are well past the threshold for additional action; we should take that action now.

Evans, who does not have a vote on the policy committee this year, argued the Fed should buy bonds for as long as it takes to produce a steady decline in unemployment, adding the rate was unlikely to fall below 7 percent before 2015 unless there's a change in policy.

EYES ON JACKSON HOLE

Chairman Ben Bernanke and other Fed officials have aggressively eased monetary policy to battle the recession, including more than three years of ultra-low interest rates and $2.3 trillion in asset purchases.

On August 1, the central bank kept monetary policy on hold, leaving interest rates at zero and reiterating the view that economic conditions will warrant keeping them there until at least late 2014.

Many policymakers thought more stimulus would be needed "fairly soon," the minutes of the meeting show, but wanted to watch the data for signs of improvement that would render moot the need for additional easing.

Since then, job creation rebounded in July after four disappointing months, and economic data has been marginally upbeat in recent weeks. Yet overall tepid GDP growth and a troubled labor market may cause central bank officials to do even more.

The next meeting is set for September 12-13, though all ears will be on Bernanke's much-anticipated speech in Jackson Hole, Wyoming on Friday for clues on policy.

Global stocks edged up on Monday and U.S. Treasuries prices rose on expectations of further stimulus from the Fed and the European Central Bank, which is battling that continent's simmering debt crisis.

'FRUSTRATINGLY SLOW RECOVERY'

Though last month Pianalto said another round of asset buying could be warranted if the recovery continues to sputter, she offered a more nuanced view on Monday, outlining some possible risks the Fed runs with its ultra-easy stance.

Policies, such as QE, that are designed to promote further declines in longer-term rates could interfere with financial stability, Pianalto said. And the Fed's large presence in some markets could "become so large that it would distort market functioning," she added.

"There are benefits to further monetary policy actions, but we have to be realistic about what those benefits will be, how large those benefits will be, and how other factors will help or hinder the effectiveness of those benefits," Pianalto said.

"We remain in a frustratingly slow economic recovery."

Evans, who will have a vote next year on the Fed's policy-setting panel, wants no part of that wait-and-see approach. Like the chiefs of the Fed's regional banks in Boston and San Francisco, Evans sees a case for QE3.

Evans said he supports an open-ended bond-buying program, an approach that appears to be gaining converts at the central bank.

The Fed could stop buying bonds after two or three quarters of steady declines in the jobless rate, Evans said, but then should continue to keep rates near zero until the jobless rate falls to 7 percent. Only in the unlikely event that inflation threatens to rise above 3 percent should the Fed change course, he said.

However, Richmond Fed President Jeffrey Lacker, appearing on the Charlie Rose TV show Friday, warned that the Fed should not risk its credibility by letting inflation get that high.

"You don't want to lose it ... you don't want to drift up to 3 (percent) and then have it be in question because it would be costly to get it back down again," said Lacker, a policy hawk has dissented this year against the Fed's conditional pledge to keep rates near zero through at least late 2014.

(Additional reporting by Clement Tan in Hong Kong; Editing by Andrea Ricci and Chizu Nomiyama)

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