Two U.S. Federal Reserve policymakers amplified their concerns over Europe's crisis on Monday, giving some kudos to the weekend deal to bail out Spanish banks but warning much is yet to be done to avoid global spillovers.
The eurozone's simmering financial and debt crisis is front and center as the Fed meets next week to decide whether it needs to take yet more policy action to insulate the weak U.S. economic recovery from slowing even more.
The European Union deal struck over the weekend to bail out debt-stricken Spanish banks "is good news and it alleviates slightly some of the concerns. Nonetheless there are many issues that Europeans are going to face," Atlanta Federal Reserve Bank President Dennis Lockhart said at a conference in Chicago.
"Markets are looking for the details of how much will be injected into what banks, whether that will be sufficient to stabilize those particular banks ... and what the terms and conditions are," he told reporters.
The EU agreed to a bailout of up to 100 billion euros for Spain's banks. But Spanish and Italian bond yields jumped on Monday as doubts set in about the impact and terms of the deal, which was designed to avoid a run on Spanish banks.
The Fed, frustrated by a faltering U.S. recovery, is keenly interested in European events.
The Fed has taken unprecedented steps including the purchase of more than $2 trillion in long-term securities to battle the deep 2007-09 recession, yet U.S. unemployment remains high at 8.2 percent.
"The European sovereign debt crisis threatens banks in that continent, and, by extension, elsewhere," John Williams, president of the San Francisco Fed Bank, said at a conference on Asian banking sponsored by his regional Fed bank.
"Clearly, it represents a significant threat to financial stability."
The U.S. central bank's policy committee meets on June 19-20, and many economists think it could act to shore up the economy.
Pressure has intensified on the Fed to take yet more policy action after U.S. job growth in May was far weaker than expected, and as the European crisis worsened in the last couple of weeks. Both Lockhart, a moderate, and the more dovish Williams have votes this year at the Fed policy meetings.
FLIGHT TO TREASURY SAFETY
Last week, Chairman Ben Bernanke said the Fed was ready to act to protect the U.S. economy if the European crisis deepens, but he offered few hints that more policy stimulus was imminent.
If it chooses to act, the Fed can buy more long-term bonds or mortgage-backed securities, or extend the co-called Operation Twist program that expires this month, in which it sells shorter-term bonds and buys longer-term ones in an effort to keep borrowing rates low.
The central bank can also adjust the date on a conditional pledge it has made to keep interest rates near zero until at least late 2014.
Lockhart said he was not convinced that current economic circumstances call for additional monetary easing "quite yet."
"I don't think any of the options should be taken off the table under the current circumstances. But I'm not convinced at this moment that the circumstances quite yet call for additional action," Lockhart told reporters.
Asked about the currently extremely low yields on U.S. Treasuries, in part caused by a "flight to safety" by investors, Lockhart said: "It remains to be seen whether that picture holds, therefore it remains to be seen whether we might need further action to sustain that level of attractive interest rates for borrowers."
"It does in some respects take the pressure off, to do something about financial conditions per se," he added.
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