October 24, 2011 / 4:11 PM / 8 years ago

Fed Focus: Fed activists loudly signal low bar to easing

WASHINGTON (Reuters) - Pro-growth activists at the Federal Reserve have gotten noisier, a sign the central bank won’t back off aggressive efforts to spur a stronger recovery despite the objections of critics.

Officials advocating bold steps to accelerate economic activity have taken their case public in recent weeks, providing a counterbalance to the more familiar, frequent warnings from Fed inflation hawks of dangers posed by a lengthy period of ultra-accommodative monetary policy.

Far from signaling gridlock, the rising tensions suggest the central bank has a solid consensus in favor of remaining active in pulling down an unemployment rate that has been at 9 percent or above for the last six months. Fresh efforts to help the housing market may also enter the equation.

It also points to a lower bar for a further easing of monetary policy. Rather than requiring a shock to the economy to prompt further action, some officials are pushing to rev up sluggish growth if things don’t start to look better.

“Damn the torpedoes, full speed ahead. This Fed will continue to engage in extremely activist policymaking, and, if anything, their hyperactivity is likely to increase from here,” said Stephen Stanley, an economist for Pierpoint Securities.

New York Federal Reserve Bank President William Dudley is the most recent member of the full-employment “doves” camp to unload, saying on Monday the Fed “could move to do more” to help the downtrodden housing market.

Others also see housing as a critical impediment to the recovery that deserves Fed attention. Fed Governor Daniel Tarullo last week called for the central bank to put further purchases of mortgage-backed securities at the top of its list of options. Boston Fed President Eric Rosengren expressed support for that approach.

Another activist, Chicago Fed chief Charles Evans, wants to hold rates low until the jobless rate falls to 7 percent, as long as inflation doesn’t threaten to top 3 percent.


What’s more, the full-employment faction gains clout next year as three officials who have dissented against assertive efforts to jolt the anemic recovery roll off the voting roster, which could pave the way for further easing.

Philadelphia’s Charles Plosser, Dallas’ Richard Fisher, and Minneapolis’ Narayana Kocherlakota lose their vote, and will be replaced with only one bona fide hawk, Richmond Fed President Jeffrey Lacker.

While it is not unusual for Fed officials to air differing views on the outlook for policy or the economy, it is the inflation-obsessed “hawks” who have dominated the soapbox in recent years.

As the Fed has pursued an activist course, chopping benchmark rates to near zero and buying $2.3 trillion in bonds to drag longer-term rates lower, it has most often fallen to Fed Chairman Ben Bernanke and his No. 2 — Janet Yellen — to defend the case for aggressive monetary accommodation.

But Bernanke is not a fixture on the Chamber of Commerce lunch circuit the way regional Fed bank presidents are. After Fed easing decisions, the public and financial markets have often heard first from officials such as Plosser or Fisher, who have not pulled any punches in airing doubts about the easy money course.

Bernanke began quarterly news conferences earlier this year, allowing him to steer the debate, offer some nuance on the central bank’s efforts to boost growth and reclaim a bit of the communications edge from the hawks.

As the doves emerge from the shadows, they are making clear not only that there is support for concerted measures to spur stronger hiring, but that Bernanke’s views represent the center of the spectrum, not its dovish edge.


That is not to say the Fed is poised for further easing steps at its next meeting on November 1-2. Policymakers discussed Evans’ idea at length at their September meeting, and agreed only that were the Fed to pursue more explicit descriptions of its longer-run objectives, it would need to explain them more clearly than the pithy post-meeting statement allows.

“Some public education would need to take place before adopting the Evans plan,” said JPMorgan Chase economist Michael Feroli.

Nor is it clear whether Tarullo’s idea to buy more mortgage-related debate is his alone or more widely supported. It was not mentioned specifically in minutes of the September meeting. Atlanta Fed President Dennis Lockhart, who is considered to lean toward the doves’ camp, expressed skepticism about the proposal last week.

Some Fed officials had been nervous that buying mortgage-backed securities meddled too heavily in a specific sector of the economy, and for a time, the central bank allowed housing debt to roll off its balance sheet.

Fed officials at their last meeting in September were already noting investors were demanding higher premiums on MBS, thereby putting upward pressure on mortgage rates, and used that to justify a decision to resume reinvesting principal payments from mortgage debt held by the central bank back into the mortgage market.

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