At Fed, louder calls for action on economy

November 10, 2011

Federal Reserve officials who advocate new action to try to strengthen the economy are becoming more vocal in their push, taking their arguments to the public and making them more forcefully within the Fed policy committee.

But words haven’t resulted in deeds — and the consensus view among the central bank’s top policymakers is that there would need to be clear evidence of new deterioration in the economy to justify any move to pump out more money.

A flurry of speeches in recent weeks led some people in the financial markets to conclude that the central bank is in a hair-trigger stance, on the verge of some new action, such as buying hundreds of billions of dollars of mortgage-related securities in a bid to bring down mortgage rates. One Fed policymaker took the unusual step of dissenting in favor of more aggressive action at last week’s meeting.

But although there are several influential Fed officials who would be inclined to do just that, the more widely held view on the central bank — reflected in its decision last week to stand pat and take no new action — is that the potential benefits are still too modest to be worth the risks. In particular, with mortgage rates already exceptionally low, it is not clear that Fed action would spur any more activity in the housing sector even if it lowered rates further.

“Things would have to get noticeably worse before a new round of QE,” said Peter Hooper, chief economist at Deutsche Bank Securities, referring to quantitative easing, or bond purchases by the Fed meant to inject more money into the economy. “There are doubts on its effectiveness, and it seems to be more something to be reserved for when things get worse and you feel it’s necessary.”

Fed officials would be more comfortable with a new wave of monetary activism if they could explain it as part of a broader strategy, such as explicitly aiming to reduce unemployment to a certain level. But at the central bank’s policy meeting last week, there was no agreement on what that overarching communications strategy might be.

If the economy shows signs of dipping back into recession — perhaps because of spillovers from the widening European debt crisis — all bets are off. There is evidence that Fed bond purchases benefit the economy more when they are made during a time of financial market dysfunction.

In the past couple of months, financial markets have been volatile but have functioned well, and economic data have pointed to a continued slow recovery. Chairman Ben S. Bernanke was noncommittal about the possibility of new action in his news conference following last week’s meeting.

“We’ll continue to ask ourselves whether or not additional stimulus or additional actions can provide a better outcome, and that’s certainly something that remains on the table,” Bernanke said.

Among Fed officials, the usual pattern in recent years has been that those who lean in a “hawkish” direction, meaning they worry more about risks of inflation than of high unemployment, have been the most vocal. Dallas Fed President Richard Fisher, Philadelphia Fed President Charles Plosser and former Kansas City Fed president Thomas Hoenig have tended to give more speeches and television interviews than their more dovish counterparts, and to dissent from formal policy moves with which they disagree.

(Fisher routinely likens easing monetary policy to drinking fine tequila, for example, and Hoenig dissented from the Fed’s policy committee at all eight meetings last year).

By contrast, those who are more inclined to use every tool the Fed has to boost growth — including Chicago Fed President Charles Evans and Boston Fed President Eric Rosengren — have traditionally been more circumspect.

But Evans has become increasingly vivid in his calls for the Fed to tolerate temporary higher inflation in an effort to spur growth, and he dissented from last week’s policy decision in favor of more action, the first dovish dissent in four years.

If inflation were 5 percent, Evans said in a September speech, central bankers “would be acting as if their hair was on fire.” He continued, “We should be similarly energized about improving conditions in the labor market.”

And Daniel Tarullo, a Fed governor who primarily focuses on bank regulation matters and has rarely weighed in publicly on monetary policy, gave a pointed speech last month calling for new purchases of mortgage bonds to try to reduce unemployment.

“The debate has shifted because we’re now in a world where unemployment is set to decline very, very slowly, if at all,” said Nathan Sheets, global head of international economics at Citigroup and a former Fed official. “The doves are being increasingly forceful, advancing the view that the current path of the economy is unacceptable.”

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