Federal Reserve policy makers last week said the central bank needs to bring down unemployment by pressing on with record monetary stimulus even as the economy shows signs of gaining strength.
Boston Fed President Eric Rosengren predicted in a speech Friday that under current policy, it will take several years to reach full employment and an inflation rate of about 2 percent. Governor Daniel Tarullo told CNBC that “I haven’t seen anything which would warrant a reconsideration” of the Fed’s plans to buy $600 billion of Treasuries through June.
The comments capped a week of remarks by central bankers indicating no change to a policy that has prompted the strongest political backlash in three decades. Fed Bank of St. Louis President James Bullard said in an interview that while the U.S. growth outlook has improved after a “strong” holiday shopping season, he wants to see more evidence before considering reducing or slowing the stimulus.
Richmond Fed President Jeffrey Lacker predicted the program will come under greater scrutiny by policy makers as growth quickens. “While the outlook may not have improved enough yet to warrant adjusting our purchase plans in the near-term, I anticipate earnest re-evaluation as economic developments unfold in the months ahead,” Lacker said Friday in a speech in Richmond, Virginia. Fed officials plan to meet in Washington on Jan. 25-26.
Politicians such as Representative Ron Paul, a Texas Republican who has advocated abolishing the Fed, have said the central bank’s so-called quantitative easing plan risks spurring inflation.
Reports Friday on retail sales and industrial production supported forecasts for quickening growth this year that may boost demand for products ranging from Ford Motor Co. cars to Apple Inc. iPads.
Purchases climbed 0.6 percent, capping the biggest annual increase in more than a decade, Commerce Department figures showed. Output at factories, mines and utilities increased 0.8 percent, the most in five months, according to data from the Federal Reserve.
Stocks rose, with the Standard & Poor’s 500 Index increasing 0.7 percent to 1,293.24 in New York trading. The yield on 10-year Treasuries increased three basis points 3.33 percent, after earlier falling to 3.25 percent, the lowest level since Dec. 20. It was little changed for the week.
Lacker and Rosengren predicted the economy will expand 3.5 percent to 4 percent this year. Growth won’t exceed 4 percent because the housing market’s recovery is likely to be weaker than usual, given the tightening of lending standards and high vacancy rates, Rosengren said.
No Boost to Recovery
“If housing-related growth is not going to boost the recovery this time around, we may need policy -- particularly monetary policy -- to continue playing a stimulative role,” said Rosengren, who doesn’t vote on monetary policy this year.
Growth of 4 percent would still leave the unemployment rate close to 9 percent at the end of 2011, a level that’s “far above anyone’s estimate of full employment,” Rosengren said.
The jobless rate has held at 9.4 percent or higher since May 2009. Rosengren said it will probably take at least four years to return to full employment.
“Until we get to the point where jobs are being created at a consistent and continuing pace that will bring down unemployment, there is going to be an inherent lack of robustness in the economy,” said Tarullo, 58, who was President Barack Obama’s first appointee to the central bank in January 2009. He said the economy has “decidedly improved.”
Lacker said he expects the economy to improve further because of a firming labor market and reduced household debt.
“Given these stronger fundamentals, it’s not a stretch to project robust growth in consumer spending this year,” Lacker said.
“Even with a relatively robust recovery, it will take several years before we attain full employment and an inflation rate close to a long-run expectation of 2 percent,” Rosengren said Friday in a speech in Mashantucket, Connecticut. “The current level of accommodation from monetary and fiscal policy is appropriate.”
At their last meeting, some officials on the Fed’s Open Market Committee said they had a “fairly high threshold for making changes” to the Fed’s $600 billion round of purchases, according to minutes of the gathering.
Fed Chairman Ben S. Bernanke said last week during a panel discussion that “we see the economy strengthening,” adding that “you’re not going to reduce unemployment at the pace that we’d like it to.”
Lacker told reporters after his speech that “it’s not inconceivable to me that we would find growth coming in strong enough in the next couple of months to warrant scaling back on the program.”
Inflation will probably rise to between 1.5 percent and 2 percent this year, Lacker said. Fed presidents rotate voting on monetary policy with Lacker voting next year.
“The downward trend in inflation during the recession had many commentators warning of the possibility of outright deflation,” he said. “At this point, I think the risk of deflation is negligible.”
Still, “the lesson of the ‘70s at this time in the business cycle is we need to be careful,” Lacker said to reporters. “For the next couple of years we need to be really careful about the potential for inflation to accelerate if we’re not vigilant enough about reacting.”
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