Federal Reserve policy makers sharpened their differences over the signs of economic decline that would warrant more asset purchases by the Fed in speeches yesterday.
Vice Chairman Janet Yellen said the Fed still has “scope for action” to fight unemployment she predicted would remain “painfully high” for years. Atlanta Fed President Dennis Lockhart said he doubted more bond buying would make a difference, while the Minneapolis Fed’s Narayana Kocherlakota said policy makers should begin tightening in 2012, assuming forecasts for lower unemployment and stable inflation prove accurate.
The officials’ remarks underscore a divided Fed that’s struggling to bring down a jobless rate stuck near 9 percent or higher for more than two years. The central bank will probably choose to step up stimulus through a third round of asset purchases next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the Fed said in a Bloomberg News survey last week.
“The dovish majority can run roughshod over those dissents,” said Carl Riccadonna, senior U.S. economist at Deutsche Bank in New York, referring to those who favor additional stimulus. “That will continue to be the case in 2012,” he said, paving the way for the central bank to engage in further asset purchases “in the first part of next year.”
Four central bank officials have dissented at policy making meetings this year, with Chicago Fed President Charles Evans calling for more stimulus while Kocherlakota, Richard Fisher of Dallas and Charles Plosser of Philadelphia voted against further easing.
The Fed purchased $2.3 trillion in housing and government debt in two rounds of asset purchases between December 2008 and June 2011.
“I am skeptical that further asset purchases will produce much gain in terms of increased economic activity,” said Lockhart, who becomes a voting member of the Federal Open Market Committee in January. “That is not to say that such a policy action would not be powerful and appropriate in other circumstances.”
The Fed is considering adopting a new communication strategy to better clarify for the public their goals and forecasts for monetary policy. Fed Chairman Ben S. Bernanke has asked a subcommittee on communications led by Yellen to look into the Fed’s options.
“The scope remains to provide additional accommodation through enhanced guidance on the path of the federal funds rate or through additional purchases of longer-term financial assets,” Yellen said in a speech in San Francisco.
San Francisco Fed President John Williams told reporters yesterday that communicating the future path of rates would be “useful” and has worked well in other countries.
“There are pretty big downside risks” to the economic outlook, with Europe being the biggest to the global economy, Williams said at the San Francisco Fed’s annual Asia Economic Policy Conference. “The economic outlook in Europe is weaker than I thought in the past, and that will have some ramifications for the economy.”
Data released since the Fed’s most recent gathering show the U.S. jobless rate unexpectedly fell in October to a six- month low of 9 percent, from 9.1 percent a month earlier. An 80,000 increase in payrolls followed gains in the prior two months that were revised up by 102,000, Labor Department figures showed in Washington.
U.S. stocks rose yesterday as consumer confidence increased by the most since 2003 and European finance ministers discussed efforts to tame the debt crisis. The Standard & Poor’s 500 Index rose 0.2 percent to 1,195.19 at 4 p.m. New York time, rallying 3.2 percent in two days.
The economy expanded less than previously estimated in the third quarter, reflecting a drop in inventories that points to a pickup in growth as 2011 comes to a close. Gross domestic product climbed at a 2 percent annual rate from July through September, less than projected and down from a 2.5 percent prior estimate, revised Commerce Department figures showed last week.
The FOMC at its Nov. 1-2 meeting left the benchmark interest rate in a range of zero to 0.25 percent, where it’s been since December 2008, and reiterated language that said the rate is likely to stay very low through at least mid-2013. The central bank also continued its so-called Operation Twist program to buy $400 billion of longer-term securities and sell $400 billion of short-term debt.
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