More signs that Federal Reserve will take steps to boost economic recovery

These leaders have been a driving force behind the nation's economic policies since the financial crisis of 2008.
By Neil Irwin
Washington Post Staff Writer
Friday, October 1, 2010; 7:24 PM

Momentum is building among senior policymakers at the Federal Reserve to begin a new round of unorthodox steps to strengthen the economy, according to remarks Friday by two top officials at the central bank.

Both men, presidents of influential Fed banks and members of its policymaking committee, cited poor economic growth and a inflation level that is lower than what Fed economists consider desirable.

William C. Dudley, the president of the Federal Reserve Bank of New York, said in a speech that "further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long."

Charles Evans, president of the Chicago Fed, said in Rome that "the size of the unemployment gap, combined with the fact that inflation has been running below the level I consider consistent with long-term price stability, suggests that it would be desirable to increase monetary policy accommodation to boost aggregate demand."

The comments by the two men reflect a growing consensus on the Fed's policymaking committee that the central bank should embark on new steps, despite a short-term interest rate target that is already near zero and a series of unconventional measures previously taken by the Fed to boost growth.

With the Fed's monetary policy committee scheduled to meet Nov. 2 and 3, it is increasingly likely that officials will move to pump hundreds of billions of dollars into the economy by buying bonds in a strategy called "quantitative easing."

Evans is viewed as a centrist on the policymaking committee. He is aligned neither with those who tend to worry most about inflation and thus are resistant to new actions that could fuel it, nor with those who tend to be concerned most about growth and have been agitating for new steps for months.

While Dudley has leaned toward the latter camp, his status as president of the New York Fed gives his words extra weight. The New York Fed is the largest and most important of the regional Fed banks, and he is vice chairman of the Federal Open Market Committee. It is his bank that would carry out any new measures to support the economy.

In his speech, Dudley argued that new bond purchases could have a meaningful impact on the economy. Some Fed policymakers are less certain, contending that new steps, with interest rates very low and the Fed already owning vast quantities of securities, aren't likely to make much difference.

But Dudley said buying $500 billion in bonds could have the same sort of impact on the economy that cutting the Fed's interest rate target another half- to three-quarters of a percentage point would, if that were possible.

Also this week, the Senate confirmed Janet Yellen to be vice chairman of the Fed. She is firmly in the camp of policymakers most deeply concerned about growth, and her new status as the central bank's No. 2 official could lend new weight to calls for more-aggressive action. Yellen was previously the president of the San Francisco Fed.

However, some Fed policymakers are likely to resist a move to ease monetary policy further.

"While none of us are satisfied with the current pace of economic expansion and job creation, presently it is not clear that conditions warrant further crisislike deployment of the Fed's arsenal," Dallas Fed President Richard Fisher said in a speech Friday, chiding media and financial market analysts who have presumed that more action is forthcoming.

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