Keep On, or Enough Already? Fed Officials Spar Over More Easing
Little over a week after U.S. Federal Reserve policymakers overwhelmingly endorsed a plan to keep buying bonds to spur economic growth and hiring, they are airing their differences over their super-easy policy.
"I think we should try as hard as we can" to turn things around, Chicago Federal Reserve Bank President Charles Evans said in an interview on Bloomberg TV, in a forceful defense of the bond-buying program, known as QE3 because it is the Fed's third round of quantitative easing since the Great Recession.
Crediting QE3 for a "definitely" improved labor market, he said the Fed should not back away from the program. "I'd like to have confidence we can sustain that improvement in the labor market through this summer," he said.
Though the U.S. central bank renewed its commitment last week to buy $85 billion in bonds per month and to keep rates low for some time to come, weaker inflation on the one hand and a steady drop in unemployment on the other have investors anxiously guessing when monetary policy will shift.
Philadelphia Fed President Charles Plosser, a policy hawk and unlike Evans not a voting member of the Fed's policy committee this year, took the opposite tack and called the effects of the bond-buying program "dubious."
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"I've never felt that our asset purchases have been that effective in addressing what's the biggest problem we face in this country, which is the employment market and the labor market," he told Bloomberg television separately on Tursday.
"I'd like to stop but I would particularly like to see us begin to slow the pace down, gradually ease our way out of this if we possibly can."
Later on Thursday, Plosser told reporters in New York that he is "not too concerned" about weaker recent U.S. inflation readings, arguing the Fed should move to stave off disinflation only if expectations begin to fall.
"I do believe we have to defend our inflation target (of 2 percent) both on the upside and the downside and it's important to do so," he added. "But as long as inflation expectations remain well anchored I'm reasonably comfortable."
Strong differences of opinion among policymakers at the U.S. central bank are not unusual, and Plosser and Evans in particular have long sparred from opposite ends of the policy spectrum.
Investors will be watching closely for any hints from Fed Chairman Ben Bernanke about his policy outlook when he gives a speech at the Chicago Fed on Friday.
Unemployment fell to 7.5 percent last month, continuing a steady but slow three-year decline, and last week the number of Americans filing new claims for unemployment benefits dropped to its lowest level in nearly 5-1/2 years.
But other economic signals have been less encouraging, including inflation that has dropped now to about half the Fed's 2-percent target.
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Low inflation has in fact prompted one policymaker, St. Louis Fed President James Bullard, to suggest the Fed may need to add to its stimulus to defend the economy against a possible sustained drop in prices.
But on Thursday Evans, whose views have been in step with those of Bernanke, said he believes the drop in inflation is temporary, and does not call for any immediate Fed policy response.
Evans, who is hosting the Chicago Fed's annual bank structure conference this week, and Plosser and Richmond Fed President Jeffrey Lacker on Thursday also waded into the debate over capital standards for banks. They were far more unanimous on that topic.
The debate about "too-big-to-fail" banks, which are perceived as implicitly relying on taxpayers to bail them out no matter how risky their business conduct, has heated up in Washington in the last few weeks.
Some regulators and other critics of the Basel III international agreement to protect against another global financial crisis have said it is too easy on banks, and that it relies too much on letting banks use complex calculations to determine how much equity they should hold.
Speaking elsewhere in New York, Lacker said that requiring banks to hold more debt that converts into equity when the firms get into trouble, an idea backed by Fed Governor Daniel Tarullo, is one way to ramp up capital though perhaps not the best.
He also said that broker dealers "deserve special attention" in this debate.
Some of his colleagues, including Boston Fed President Eric Rosengren, have suggested requiring higher capital at such firms.
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Evans argued that financial institutions should have better quality and more capital to buffer themselves against sudden losses, while Plosser said the United States is falling short in its effort to end the too-big-to-fail problem, almost three years after it adopted the Dodd-Frank financial reform law.
Plosser said regulators like the Fed should require higher capital from banks and adopt a fresh approach to winding down firms that face bankruptcy. "Can we end too big to fail? I think we can, but I believe the current efforts may come up short," he said.
Addressing another of the Fed's concerns as it supports the U.S. economy and supervises its financial sector, Fed Governor Elizabeth Duke said a recovery has taken root in the U.S. housing market. In Washington, she argued that resolving uncertainty over mortgage regulations would make the recovery stronger.