* Evans says economy needs much more policy support
* Rosengren: Should aggressively counter deflation threats
* Evans says Fed should consider price-level targeting
* Rosengren votes this year, Evans next year on Fed policy
By Kristina Cooke
BOSTON, Oct 16 Two top Federal Reserve
officials argued for further aggressive action by the central
bank, with one saying the economy needs "much more" help and
the other pointing to Japan's painful lessons.
With nearly one in ten in the U.S. labor force unable to
find work and already very low inflation threatening to drop
further, the U.S. central bank is expected to offer the economy
more support at its next policy meeting on Nov. 2-3.
Most analysts expect the Fed will embark on a fresh round
of Treasury purchases, over and above the $1.7 trillion in
longer-term assets it has already bought.
"In my opinion, much more policy accommodation is
appropriate today," Chicago Federal Reserve Bank President
Charles Evans told a conference hosted by the Boston Fed,
repeating an argument he made earlier this month.
Boston Fed President Eric Rosengren, speaking at the same
event, said Japan's drawn-out battle with deflation shows
prevention may be easier than the cure, and policymakers should
respond aggressively before "pernicious" deflation takes hold.
"Insuring against the risk of deflation may be much cheaper
than waiting until it has occurred and then trying to address
it," said Rosengren, who has a darker view of the economic
outlook than some of his colleagues at the central bank.
"A gradual response may not be as effective as a more
active response to arrest deflationary pressures before they
become embedded in thinking that can affect household and
business spending," he said.
U.S. inflation unexpectedly slowed in September even as
retail sales picked up, keeping pressure on the Fed to act soon
to lessen the risk of a downward price spiral. [ID:nN15191048]
Record low interest rates in rich countries, and the
prospect of the Fed pumping more dollars into the economy, are
funneling huge capital flows into high-yielding emerging
markets, pushing up their currencies. The resulting currency
tensions are expected to be a live issue at meetings of the
world's top finance officials in South Korea next week.
Rosengren and Evans' recent remarks put them squarely in
the camp that says monetary policy can and should do more to
support the economy.
Fed Chairman Ben Bernanke, speaking on Friday, appeared to
be sympathetic to their views as he gave his most explicit
signal yet that more easing is on the horizon.
To see where officials stand along the hawk/dove spectrum:
link.reuters.com/ryv97p or [ID:nN01107830]
For more stories on Fed policy, see [FED/AHEAD]
Evans fleshed out his argument that the Fed should consider
temporarily aiming for higher inflation to make up for
below-target inflation now, as well as strengthening its
commitment to keeping rates low.
Evans said price-level targeting could be a useful
complement to the Fed's other strategies in an environment in
which households and businesses are so cautious about the
future that they save more than they invest, despite very easy
The Fed has an informal inflation target of 1.7 to 2
percent. For the 12 months through August the core personal
consumption expenditure price index, USPCE2=ECI the Fed's
preferred inflation gauge, was running at 1.4 percent.
New York Fed President William Dudley also suggested
earlier this month that price-level targeting could help the
Fed achieve its goals more quickly.
Evans said fears that the policy would be difficult to
communicate to the public may be overblown.
"My personal viewpoint is that it is horribly cynical to
think that good communication is beyond our ability, especially
if that is the best policy," said Evans, who will rotate into a
voting role on the Fed's policy-setting panel next year.
Rosengren, who has a vote on policy this year, said the
first round of Fed asset purchases was effective in bringing
down long-term interest rates, adding that purchases may also
work by signaling rates will stay low.
He added any asset purchase program should be flexible.
"The scale of the program should be sensitive to the
prevailing conditions, and the size of the program would need
to vary to accomplish a particular interest rate outcome," he
(Additional reporting by Ann Saphir in Chicago; Editing by