| NEW YORK/MADRID
NEW YORK/MADRID Feb 12 The subtle tug-of-war of
U.S. monetary policy was on full display on Tuesday as one top
Federal Reserve official said timidity could complicate the
country's already weak economic recovery, while another warned
about the risks of being too bold.
Atlanta Fed President Dennis Lockhart, speaking in Madrid,
predicted the U.S. economy would remain weak and cautioned that
unemployment, at 7.9 percent last month, could become entrenched
if left unaddressed.
"A sense of urgency is appropriate," said Lockhart, a
centrist who does not vote on Fed policy this year. "If
policymakers are too patient, what started as cyclical problems
can evolve into structural problems."
While Lockhart's view is in the majority of the U.S. central
bank's 19 policymakers, including that of Fed Chairman Ben
Bernanke, there are also a handful of more hawkish voices who
are less comfortable with the aggressive policies adopted to
spur growth and hiring.
Kansas City Fed President Esther George, a voter who
dissented at a Fed policy meeting last month, said the Fed could
disrupt markets if it actively sells large amounts of
mortgage-backed securities when the time comes to tighten
Addressing an audience at University of Nebraska-Omaha,
George also warned that investors could question the central
bank's commitment to its 2-percent inflation goal if inflation
expectations begin to rise.
When the time finally comes, "actively selling a large
amount of agency mortgage backed securities ... could be
potentially disruptive to markets and market functioning," she
said, adding: "These actions are untested."
Both Lockhart and George largely repeated comments
previously made on the Fed's policies, which include near-zero
interest rates likely over the next couple of years and $85
billion in monthly purchases of Treasury bonds and mortgage
Bernanke has defended the Fed's aggressive easy-money
policies, arguing the economy needs to grow quicker to lower
unemployment and withstand tighter fiscal policies and threats
from abroad. He and others say the economy, especially interest
rate-sensitive sectors like sales of homes and automobiles, has
responded to monetary policy.
"While we've made progress, there's still quite a ways to go
before we'll be satisfied," Bernanke said in January.
Yet the slow overall recovery has cast some doubt on the
U.S. central bank's far-reaching strategy, with some, including
some Fed officials and congressional Republicans, warning that
the multi-trillion-dollar quantitative easing efforts risk
future inflation and could crimp the Fed's ability to tighten
policy when the time it right.
The U.S. economy likely expanded only slightly in the fourth
quarter, despite an early government estimate that Gross
Domestic Product (GDP) unexpectedly fell at a 0.1 percent rate.
As it stands, overall growth was just 2.2 percent in 2012, below
the 3-percent pace to which the United States is accustomed.
In December, the Fed unveiled a so-called thresholds plan in
which it pledged to keep interest rates ultra low until
unemployment drops to 6.5 percent, from 7.9 percent last month,
as long as inflation expectations remain below 2.5 percent.
In adopting these thresholds, the Fed has expressed some
tolerance for having the inflation outlook exceed its 2-percent
goal, George said on Tuesday.
That in turn "carries with it the risk that longer-term
inflation expectations may flip above levels consistent with"
the goal, and "cause the market to question the Federal
Reserve's commitment to its inflation goal," she said.
Long-term inflation expectations usually predict actual
inflation, George noted.
So far this year, U.S. inflation expectations have edged
Nonetheless, Lockhart said he expects the Fed will need to
continue its asset buying into the second half of this year in
order to keep pressure on long-term interest rates, and
encourage investment and hiring.