A string of speeches from top Federal Reserve officials on Tuesday suggested the US central bank is willing to be aggressive in its drive to beef up economic growth, yet also highlighted a small but vocal minority opposing fresh stimulus.
As Fed policymakers took to the podium following their announcement of an open-ended bond-buying program last week, William Dudley, the New York Federal Reserve Bank’s influential president, said officials are committed to accelerating the pace of economic recovery.
The US economy grew at just a 1.7 percent annual rate in the second quarter, not enough to put a dent in the nation’s jobless rate, which stood at 8.1 percent last month.
“If you’re trying to get a car moving that is stuck in the mud, you don’t stop pushing the moment the wheels start turning —you keep pushing until the car is rolling and is clearly free,” said Dudley, a former partner at Goldman Sachs.
Dudley, however, also emphasized that the policy was sufficiently flexible to accommodate any shift in the outlook.
“If the economy is weaker, we’ll do more,” he told a business group in Florham Park, New Jersey. “If the economy is stronger, and we see a substantial improvement in the outlook for the labor market sooner, we’ll end up doing less.”
Chicago Fed President Charles Evans, a forceful advocate for more monetary stimulus, said policymakers would likely decide at the end of the year to keep their asset purchases from dwindling when another program aimed at lowering long-term interest rates known as Operation Twist expires.
Following a two-day meeting, the Fed announced on Thursday that it would buy $40 billion in mortgage-backed securities per month and signaled a willingness to do more as needed until the outlook for employment improved significantly.
“I would be surprised if we would see enough evidence of that by the end of this year,” Evans told reporters after a speech in Ann Arbor, Michigan.
The new mortgage-related purchases come on top of about $45 billion per month in long-term Treasury purchases funded by sales of short-term securities the central bank holds under the Twist program.
“I would expect we would continue with something like an $85 billion base of purchases. That’s a benchmark to start from,” Evans said.
The central bank in late 2008 slashed interest rates to near zero and has since bought $2.3 trillion in securities in an unprecedented drive to spur growth and revive the economy after the worst recession in decades. Yet the recovery, especially in jobs, has been slow, leading the central bank to say it expects to keep rates at rock bottom at least through mid-2015.
A CONSENSUS WITH CAVEATS
While the vote for the new policy was 11-1, with only Richmond Fed President Jeffrey Lacker dissenting, it was clear that the internal consensus was not complete. Lacker explained his dissent further on Tuesday, arguing that he thought the new measures risked driving up inflation expectations in a way that would damage the central bank’s credibility.
Richard Fisher, head of the Dallas Fed and an avowed inflation hawk who is not a voter on the central bank’s policy panel this year, said he did not believe the new steps would be very effective and that he would have voted against the decision.
“I would argue that it is less impactful right now because you have other things inhibiting businesses from making decisions on (capital expenditures) and employment,” he told CNBC. Fisher has frequently argued that uncertainty over regulatory and budget policy is the main factor restraining the US recovery.
Speaking to Reuters, James Bullard of the St. Louis Fed, who moves into a voting slot next year, said he also opposed the new stimulus. But he offered a somewhat different reasoning, suggesting that while further bond buying could be effective, he did not believe the economic data had gotten bad enough to warrant more action.
“I would have voted against it based on the timing. I didn’t feel like we had a good enough case to make a major move at this juncture,” said Bullard. “I just would have wanted to wait to see a little bit more about how that’s going to develop.”
In a news conference last week explaining the central bank’s action, Fed Chairman Ben Bernanke emphasized that he had broad support within the central bank for the new measures. Indeed, the way the central bank is structured gives more power to the presidentially appointed, Washington-based board than to the regional Fed presidents, who vote on policy on a rotating basis.
There are seven members of the Fed board and 12 regional banks, but only five of the banks have a vote on monetary policy at any given time.
Wall Street economists have been trying to pinpoint exactly what would constitute a “substantial” improvement in the outlook for the labor market—a condition that the Fed last week suggested would halt the new monetary easing.
According to the median of forecasts in a Reuters poll on Friday, economists expect the Fed will buy a total of $600 billion of bonds under the latest round of purchases, and will look for a US unemployment rate of 7 percent before it halts the program.