Tags: Fed | Officials | Odds | Further | Easing | James | Bullard

Fed's Hoenig Warns: More Easing May Fuel Bigger Problems

Friday, 22 Oct 2010 07:10 AM

Two top U.S. Federal Reserve officials gave competing views on the need for more monetary stimulus to the U.S. economy, continuing a public debate over further easing even as the core view at the U.S. central bank appears to favor such a move.

St. Louis Federal Reserve President James Bullard said on Thursday he would favor Fed purchases of Treasury securities in $100 billion increments one Fed meeting at a time if the U.S. central bank decides monetary easing is necessary.

"If we do decide to go ahead with quantitative easing ... we could think in units of about $100 billion," he said.

"And then I think we could give forward guidance for the next meeting that would suggest how likely the committee thinks it is to continue these purchases," he added.

Bullard's comments add to those of other Fed officials, including Chairman Ben Bernanke, whose remarks suggest the U.S. central bank is on the cusp of pumping more money into the economy to support a flagging recovery.

But Kansas City Fed President Thomas Hoenig, one of the Fed's most consistent hawks, sought to highlight the risks of such a move, repeating his warning that flooding the economy with liquidity can create problems down the road, including as yet unseen bubbles.

He said he unhappy with unemployment at 9.6 percent, but added: "if you try and bring it down too rapidly you are in danger of creating the next problem."

The Fed cut interest rates to near zero in 2008 and bought $1.7 trillion of longer-term securities to pull the economy out of recession, but with an anemic recovery and persistently high unemployment, policymakers are expected to step in with another round of stimulus.

Analysts anticipate around $500 billion in fresh Treasury buying to be announced at the Nov. 2-3 meeting, and some see the U.S. central bank buying $1 trillion or more.

Bernanke said last week that a prolonged period of high unemployment could choke off the U.S. recovery and that the low level of inflation presented an uncomfortable risk of deflation. Such circumstances would seem to meet the threshold for further Fed action, he said.

On Tuesday, Atlanta Fed President Dennis Lockhart said any additional Fed securities purchases would have to be large enough to have an impact and that increments of about $100 billion would be roughly on target.

TOUGH CALL

Bullard, a voter on the Fed's policy-setting panel this year, said the decision on further easing is "a tough call," but acknowledged that sluggish economic growth and a grim jobs market are little improved in recent months.

"We've only got this weak data, weak job growth, and so we're not that different from the position we were in during the summer," he said.

Hoenig, who has used each of his votes on the Fed's policy-setting committee this year to dissent, struck a more bullish tone on the economy, predicting the modest recovery could pick up next year.

He repeated his call to "normalize" interest rates by bringing them back to 1 percent, and said that trying to lower them further may not spark much demand, could lead to higher-than-intended inflation, and could hurt the Fed's credibility.

His views appear to be shared by a minority at the Fed who also see the costs outweighing the benefits.

Bullard, who is at the center of a continuum among policymakers between those who would contain inflation at all costs and those who emphasize full employment, said he does not think the Fed should set a ceiling on how much further easing it is willing to provide.

"You just leave it open-ended," he said. "People would impute what they think the Fed's going to do based on their own forecasts... We would do the best we can to communicate how we think the program is evolving."

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Two top U.S. Federal Reserve officials gave competing views on the need for more monetary stimulus to the U.S. economy, continuing a public debate over further easing even as the core view at the U.S. central bank appears to favor such a move. St. Louis Federal Reserve...
Fed,Officials,Odds,Further,Easing,James,Bullard,Thomas,Hoenig
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2010-10-22
Friday, 22 Oct 2010 07:10 AM
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