Tags: Fed Divided on Bond Buying Risks | Benefits

Fed Divided on Bond Buying Risks, Benefits

Monday, 08 Nov 2010 02:52 PM

Top officials at the U.S. Federal Reserve Monday sounded differing notes on the central bank's bond-buying program, with one arguing it was an effective way to fight deflation risks and another warning it might need to be curbed.

The remarks from St. Louis Federal Reserve Bank President James Bullard, Dallas Fed chief Richard Fisher, Fed Governor Kevin Warsh and Thomas Hoenig of the Kansas City Fed underscored tensions within the central bank over the wisdom of the decision to buy a further $600 billion in government debt.

"While this policy carries both risks and rewards ... the benefits outweigh the risks," Bullard told a group of securities analysts in New York.

He said worries the policy could create high inflation down the road were "legitimate and important," but added that the disinflationary trend "is worrisome right now."

The central bank's decision has sparked an unusually vocal public debate among Fed officials, while drawing the ire of many other nations, which worry the United States is deliberately undercutting the dollar.

Warsh, who like Bullard backed the new Fed program in a vote last week, expressed concern about the decision. He said he would have preferred the adoption of "pro-growth fiscal, regulatory and trade policies" to spur growth.

Fisher said the program would only work if lawmakers addressed the fiscal and regulatory uncertainties that he said were holding back businesses from expanding.

"I would suggest that even if you share my cautious perspective on this matter, you might be assuaged by looking at this new initiative as a bridge loan to fiscal sanity," he told a meeting of financial professionals in San Antonio.

Warsh emphasized that the policy would be subject to regular review and adjusted if needed, and he raised the prospect that rising inflation risks could lead the central bank to curb the program even with unemployment still painfully high.

"If the recent weakness in the dollar, run-up in commodity prices and other forward-looking indicators are sustained and passed along into final prices, the Fed's price stability objective might no longer be a compelling policy rationale," he said.

"Policies should be altered if certain objectives are satisfied, purported benefits disappoint, or potential risks threaten to materialize," Warsh said.

However, Bullard said his best guess was that the full amount would be purchased by mid-2011, as announced. "Given the outlook now ... it looks like we will follow through on that and reassess at that point," he said in an interview with Market News International published Monday.

CRITICS ABOUND

Many economists think the Fed could eventually decide to push beyond the $600 billion in purchases announced last week, notwithstanding differing views within the central bank.

Bullard said the U.S. recovery had slowed, putting it in a disinflationary trend that needed to be addressed to avoid a debilitating bout of deflation. He said the unconventional bond-buying program should prove as effective as traditional policy.

Warsh, likewise, said the economy's performance has been unimpressive. In contrast, Hoenig, the only official to vote against the Fed's decision last week, emphasized his view that the conditions were already in place for a quickening of economic growth.

The Fed's decision to add to the $1.7 trillion in government and mortgage-related debt it has already bought has driven down the value of the dollar and drawn scathing comments from countries that see the United States pushing for an export edge.

In response to an audience question about complaints by countries such as China and Germany about the Fed's decision, Bullard said the U.S. central bank must act to fulfill its mandate of price stability and full employment.

"You can't have other people around the world calling the shots on that mandate," he said.

Warsh, however, said heightened tensions in currency and capital markets raised the risk of a more difficult and protracted global economic recovery, and said these long-term risks need to be taken into account.

"Should these risks threaten to materialize, however one gauges the probabilities, I am confident that the (Fed) will have the tools and conviction to adjust policies appropriately," he said.

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Top officials at the U.S. Federal Reserve Monday sounded differing notes on the central bank's bond-buying program, with one arguing it was an effective way to fight deflation risks and another warning it might need to be curbed. The remarks from St. Louis Federal Reserve...
Fed Divided on Bond Buying Risks,Benefits
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2010-52-08
Monday, 08 Nov 2010 02:52 PM
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