ST. LOUIS (Reuters) - Two top Federal Reserve officials said on Thursday that monetary policy is at the right level for an economy that has fought back from what appeared to be the brink of recession over the summer.
“Some of the data has been better during September and October,” St. Louis Federal Reserve Bank President James Bullard told reporters on the sidelines of a conference. “Monetary policy is appropriately calibrated for this situation.”
Cleveland Fed Bank President Sandra Pianalto also said she believes Fed policy is appropriate.
The remarks of the two non-voters on policy matters this year suggest a Fed debating how aggressively to support an economy that while still growing, is not expanding rapidly enough to quickly lower high unemployment.
Bullard said the Fed should now wait and see how policies it has put in place, including a recent decision to replace shorter-term securities it holds with longer-term ones, affect the economy before taking any further actions, Bullard said.
The portfolio adjustment has been referred to as “Operation Twist” because it mirrors a Cold War era Fed initiative that also sought to “twist” interest rates.
“Given that the tone of the data has been better in the last six weeks ... then I think you probably want to get into next year before you start thinking about what you do on top of Operation Twist,” he said.
Headline inflation should move back to the Fed’s preferred range of around 2 percent, he added.
Cleveland’s Pianalto described the recovery as “painfully slow” and unlikely to gather speed soon.
Given the backdrop of weak income growth and the decline in household wealth, consumers are reluctant to spend, she told business leaders in Toledo, Ohio.
“In order for the U.S. economy to make substantial progress in reducing the unemployment rate, economic growth clearly needs to accelerate,” she said.
Another Fed official said there is little evidence the bulk of U.S. unemployment, which is at a lofty 9.1 percent, is structural. However, such a problem could develop if more people don’t find work quickly, the Wall Street Journal reported, citing an interview with Federal Reserve Governor Daniel Tarullo.
“If you don’t get unemployment down more quickly than it seems to be going now, we could have more of a structural unemployment problem in the future,” Tarullo, who supervises regulatory affairs at the U.S. central bank, was quoted as saying.
Unemployment could be reduced by boosting demand in the economy, meaning if the Federal Reserve or the Congress did more to bolster consumption, more Americans would have jobs, said Tarullo who has a vote on interest rate decisions.
The Fed at its September meeting said it will replace $400 billion of short-term securities on its portfolio with longer term ones to push longer-term interest rates lower. It will also replenish its holdings of mortgage-related debt to support the depressed housing market.
Those actions are the latest in a long series of extraordinary steps to boost growth following a financial panic and deep contraction. The Fed cut rates to near zero almost three years ago and announced in August rates would likely stay that low through the middle of 2013. The central bank has also bought $2.3 trillion in securities to encourage borrowing.
Bullard is viewed as a centrist on the spectrum of views between inflation-focused “hawks” and full-employment emphasizing “doves.” Pianalto and Tarullo are seen as leaning toward the dovish camp.