A soft economic recovery marked by high unemployment and tame inflation should allow the Federal Reserve to keep interest rates low for a long time, three top central bank officials said on Wednesday.
At the same time, the policymakers extended their efforts to defend the Fed's record as a regulator, which has come under heavy attack from lawmakers debating the shape of financial reform legislation.
In a string of dovish speeches, the officials suggested any tightening of U.S. monetary policy by the policy-setting Federal Open Market Committee would not come for at least several months.
"I fully support the message of the most recent FOMC statement to the effect that the fed funds target rate will remain exceptionally low for an extended period," Atlanta Federal Reserve Bank President Dennis Lockhart told the Harvard Club.
The Fed — the U.S. central bank — slashed benchmark interest rates to near zero in December 2008 and undertook an array of emergency lending measures to address the most severe financial market meltdown since the Great Depression.
Fed officials next gather to debate policy on March 16 and financial markets will be listening closely for any clues that the era of easy money may soon draw to a close.
Boston Fed President Eric Rosengren, speaking in Philadelphia, struck much the same tone as Lockhart. He downplayed concerns, expressed by some officials, that keeping rates too low for too long could fuel renewed asset bubbles.
"If we take a good hard analytical look at the last recovery, we see that the low fed funds rate was not the standout, and stand-alone, culprit that many assume," he said at a conference sponsored by the Interdependence Center.
"This is a crucial matter to consider right now, when rates are very low — in my opinion, totally appropriately — because some are predicting that these rates will fuel another bubble."
His counterpart at the Dallas Fed, Richard Fisher, disagreed, saying excessively low rates helped fuel the housing bubble that played a role in triggering the credit crisis.
Still, Fisher said he favored keeping rates on hold for the foreseeable future given high unemployment. Economists expect a report on Friday to show the jobless rate rose to 9.8 percent in February after a surprise drop to 9.7 percent in January.
All three officials seemed to believe inflation was not an immediate source of concern.
The Fed, in its anecdotal Beige Book report on Wednesday, said economic activity picked up modestly last month, with the pace of layoffs slowing. Still, it said hiring plans were "generally soft" with wage and prices pressures muted.
Beyond its low-rates policy in the early 2000s, the Fed has come under heavy criticism for what many see as a lax approach to regulation that allowed financial imbalances to fester, leading to the worst credit crisis in generations.
With debate over how to best revamp the regulatory structure still raging in Washington, the concerted campaign by Fed officials appeared to be making some strides.
Key figures in the Senate's banking committee, including chairman Christopher Dodd and top Republican Richard Shelby, appeared to be warming up to the idea of allowing the Fed to keep many of its current powers.
Lockhart said that "removing the central bank from a supervision role designed to provide totally current, first-hand knowledge and information will weaken defenses against recurrence of financial instability."
Another key focus of reform efforts is the issue of financial firms that are considered too big to fail. While many at the Fed have favored setting higher capital requirements for such institutions, Fisher from the Dallas Fed would like to take things a step further.
"The disagreeable but sound thing to do regarding institutions that are too big to fail is to dismantle them over time into institutions that can be prudently managed and regulated across borders," he said.
One prominent proposal for reform, known as the Volcker rule after Paul Volcker, the former Fed chairman and now White House economics adviser who devised it, would limit taxpayer backing for banks whose primary activities are speculative in nature.
"I align myself closer to Paul Volcker in this argument," Fisher said.
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