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Fed Officials Beginning to Make Intentions Clearer

In the clearest calls yet by Federal Reserve officials to pump more cash into the economy, two Fed policymakers said Friday that more action would likely be needed unless the outlook improves.

William C. Dudley, President and CEO of the Federal Reserve Bank of New York
Stan Honda | AFP | Getty Images
William C. Dudley, President and CEO of the Federal Reserve Bank of New York

William Dudley, president of the Federal Reserve Bank of New York, described current conditions of high unemployment and low inflation as "unacceptable" while Chicago Federal Reserve Bank President Charles Evans said more easing was "desirable."

Evans, speaking in Rome, framed the debate over further easing by the U.S. central bank as one of "how much" and "how," rather than whether the Fed should take steps in the first place.

But in a reflection of the fundamental differences that still divide policymakers, Dallas Fed Bank chief Richard Fisher said the debate is not yet over.

Fisher, who has said only a shock to the system should spur further action, weighed in strongly against what he termed "the Fed's showing a little leg of inflationary permissiveness."

After a policy meeting last week, the central bank said it was prepared to do more to boost the recovery and lift inflation if necessary.

"Further action is likely to be warranted unless the economic outlook evolves in such a way that makes me more confident that we will see better outcomes for both employment and inflation before too long."" -Chairman of the Federal Reserve Bank of New York, William Dudley

It has already cut interest rates to near zero and pumped $1.7 trillion into the financial system through purchases of longer-term Treasury securities and mortgage-related debt.

Many analysts expect the Fed to launch a renewed round of bond buying, or quantitative easing, as soon as its next policy meeting on Nov. 2-3.

Weak manufacturing and inflation data Friday bolstered those expectations and pushed the dollar down to a six-month low against the euro.

"Further action is likely to be warranted unless the economic outlook evolves in such a way that makes me more confident that we will see better outcomes for both employment and inflation before too long," Dudley told a conference in New York. He said the costs of the tools the Fed has available to ease policy further "do not appear prohibitive."

As head of the most important regional Fed bank, Dudley has a permanent vote on Fed policy. Evans and Fisher will rotate into voting seats on the Fed's policy committee next year.

Dudley and Evans are seen as among the more dovish Fed officials. Fisher is viewed as among the inflation hawks.

While hawks largely captured the debate after a Fed meeting on Aug. 10, officials more inclined toward further easing are now making their voices heard. Boston Fed chief Eric Rosengren told Reuters on Wednesday that further easing would be needed if the outlook didn't improve.

"There appears to be a significant set of FOMC members in favor of further policy stimulus in the near term," Barclays Capital analyst Peter Newland wrote in a note to clients.

No Consensus Yet

The U.S. economy looks to have picked up the pace slightly after expanding at a sluggish 1.7 percent annual rate in the second quarter. Still, growth has been too modest to reduce an unemployment rate economists expect hit 9.7 percent in September.

Ben Bernanke
Ben Bernanke

Fisher and some other Fed officials, however, believe a further relaxation of monetary policy is not needed and may do more harm than good. Philadelphia Fed President Charles Plosser said Wednesday he would only support more easing if real deflation risks arose.

Taking a more centrist view, the Cleveland Fed's Sandra Pianalto said Thursday she was still weighing the efficacy of policy tools the Fed has available.

As policymakers diverge, the view to watch will be that of Fed Chairman Ben Bernanke, who has not weighed in on the issue since the Fed's last meeting on Sept. 21.

If the Fed decides to act in November, it is still an open question whether it will take an incremental approach to further asset purchases or announce a big number upfront.

Pushing on a String

Fisher said he had concerns about the efficacy of further action. He repeated his argument that businesses are holding back on expansion not because money is tight but because of the lack of certainty on tax policy and excessive rule-making.

"Further quantitative easing might be pushing on a string," Fisher told the Vancouver Board of Trade.

Dudley addressed this view directly in his remarks, saying it was too dark. He said he believes the Fed could stimulate demand in two potentially complementary ways: by buying more assets and by offering a more explicit inflation objective.

He said $500 billion of asset purchases would likely have about the same impact as a 0.5 percentage point or 0.75 percentage point cut of the Fed's benchmark federal funds rate, but he cautioned this would depend on how markets perceive the Fed's actions.

"Although the responsiveness of demand to reductions in interest rates is probably lower in a world in which balance sheet constraints are important, the responsiveness is not zero," he said. "I believe that it remains significant."

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