Bloomberg News

Fed Officials Show Divisions Over Need for Additional Easing

November 29, 2011

Nov. 16 (Bloomberg) -- Federal Reserve officials aired divisions over whether the central bank should wait to see if the economy deteriorates before taking further steps to reduce borrowing costs and lower unemployment.

More action “may be needed” to reduce “persistently high unemployment,” San Francisco Fed President John Williams said yesterday in Scottsdale, Arizona. St. Louis Fed President James Bullard said the central bank’s policy is “appropriately calibrated” and should only be loosened if the economy deteriorates.

The split illustrates the challenges Chairman Ben S. Bernanke, who said Nov. 2 that additional stimulus “remains on the table,” may face in generating broad support among policy makers for measures such as a third round of asset purchases. A report yesterday showing retail sales last month rose more than projected may bolster the case for restraint.

The economy “has to falter from its current pace” to justify more easing, Bullard, 50, who backed the Fed’s second round of bond buying a year ago, told reporters after a speech in St. Louis yesterday. “We already have a very easy policy in place. That’s something that is often missed in this discussion. We are appropriately calibrated for the situation we are in.”

Bullard and Williams aren’t voting members of the Federal Open Market Committee this year. Bullard next has a vote in 2013, while Williams gets a vote in January 2012 for the first time since becoming president of the San Francisco Fed in March.

Chicago Fed President Charles Evans, who voted against the FOMC’s Nov. 2 decision to refrain from additional easing, yesterday urged “increasing amounts of policy accommodation” to reduce a 9 percent unemployment rate that’s far above the Fed’s objectives.

‘Very Big Problem’

“We ought to be behaving as if there’s a very big problem out there,” Evans, 53, said in New York at the Council on Foreign Relations.

A report yesterday from the Commerce Department showed retail sales rose 0.5 percent in October as Americans snapped up automobiles and Apple Inc. iPhones, giving the world’s largest economy a boost entering the final quarter of 2011.

The gain followed a 1.1 percent increase for September. The median forecast of 81 economists surveyed by Bloomberg News was an increase of 0.3 percent. Purchases of electronics jumped by the most in two years.

Treasuries pared gains as the report tempered concern Spanish and Italian governments will struggle to implement promised austerity measures to narrow their budget deficits. Ten-year yields fell one basis point to 2.05 percent at 5 p.m. in New York. The Standard & Poor’s 500 Index rose 0.5 percent to 1,257.81.

Three Dissenters

Dallas Fed President Richard Fisher, one of three officials to dissent from the August and September decisions to ease policy, said Nov. 14 that he sees decreasing odds the central bank will need to ease policy further amid signs the U.S. economy is “poised for growth.”

“The direction we’re moving in is positive,” Fisher said in an interview at Bloomberg’s headquarters in New York. The risk of another recession “is negligible,” said Fisher, 62. Separately, he told reporters yesterday that he would have dissented this month if the FOMC had decided to ease further.

Bernanke said this month that economic improvement will probably be “frustratingly slow” and that buying mortgage bonds is a “viable option” as policy makers forecast a 1 percentage-point drop in the jobless rate to about 8 percent over two years. The rate was 4.4 percent in October 2006.

Leading Option

Any new asset purchases would follow two rounds totaling $2.3 trillion that lasted from December 2008 until June 2011. The last net buying of mortgage debt occurred in March 2010, though the Fed decided in September to reinvest maturing housing debt into new mortgage-backed securities instead of Treasuries. Fed Governor Daniel Tarullo on Oct. 20 said buying mortgage bonds should be a leading option because it would help boost home-buying and consumer spending.

Bullard voiced less support for a new round of so-called quantitative easing.

“Outright asset purchases are a potent tool and must be employed carefully,” he said. “Increases in the size of the balance sheet entail additional inflationary risks if accommodation is not removed at an appropriate pace.”

Fed officials have also been considering making more explicit the conditions under which the benchmark federal funds rate would remain near zero, where central bankers have pledged to leave it until at least mid-2013. Evans advocates a promise to keep rates low until either unemployment falls below 7 percent or the medium-term inflation outlook rises above 3 percent.

Policy Intentions

In a situation of “continued moderate growth, persistently high unemployment and undesirably low inflation,” further monetary easing may be warranted “either in the form of additional asset purchases or further forward guidance on our future policy intentions,” Williams, 49, said in yesterday’s speech.

Bullard said it’s “unwise” to tie interest rates directly to the level of joblessness. “Monetary policy could be pulled off course for a generation” if it were linked to a numerical unemployment outcome and the labor market remained weak for several decades, he said.

--With assistance from Vivien Lou Chen and Caroline Salas Gage in New York, Steve Matthews in St. Louis and Joshua Zumbrun in Scottsdale, Arizona. Editors: Gail DeGeorge, Carlos Torres

To contact the reporter on this story: Scott Lanman in Washington at

To contact the editor responsible for this story: Christopher Wellisz at

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