Fissures at the Federal Reserve over the correct course of future monetary policy were on display, as one policy maker called for further easing even as another suggested for a more tight policy that may be needed.
Jeffrey Lacker, the Richmond’s Fed’s hawkish president, brought attention to the fact that inflation is likely to ebb in the upcoming months as pressures from high energy and commodity prices eased. But he cautioned that inflation still remains a threat.
“My sense is that we should not be adding monetary stimulus at this point,” Lacker said in response to questions from reporters. “A case could be made that withdrawing stimulus may be warranted soon.”
Lacker, who spoke in Salisbury, Maryland rotates into a voting spot on the Fed’s policy-setting panel next year.
Speaking in Detroit, Charles Evans, the Chicago Fed’s dovish ched, stated that some temporary increase in inflation may be the price that the nation must pay if Fed policy is to reduce unemployment.
The Fed should begin to step up its campaign to boost what he called a “withering economy” with a vow to keep interest rates at zero until the unemployment rate falls below 7 percent, Evans stated.
If that does not work fast enough, the Fed should return to buying bonds to push down long-term rates, he revealed.
“Given how badly we are doing on our employment mandate, we need to be willing to take a risk on inflation going modestly higher in the short run if that is a consequence of policies aimed at lowering unemployment,” said Evans, who has a policy-setting vote this year.
“Rather than fighting the inflation ghosts of the 1970s, I am more worried about repeating the mistakes of the 1930s,” when the Fed failed to see that its monetary policy was unduly restricting growth, he said.
The central bank last month committed to selling $400 billion in short term Treasuries in order to purchase longer-dated government bonds. The move, known as Operation Twist, drew three dissents, as did a Fed promise in August to keep rates low throughout atleast mid-2013.
While Lacker had argued that such open dissent was a sign of healthy internal debate, not a fractured central bank, Evans had suggested that calls by fellow policymakers for tighter, rather than looser monetary policy may be undercutting the Fed’s efforts to help stimulate the economy.
“Financial markets are going to look at the entire breadth of the commentary and come up with their own assessment of what that means for the probability of a premature exiting from our current stance,” Evans told reporters after his speech. “To the extent that they put more weight on that, that means that we are not going to be as accommodative as I believe our current intentions are.”
To emphasize the severity of the employment situation, Evans had included in his otherwise boring slides an “emoticon” with flames coming out of the top of the head.
The Fed could keep inflation in check by watching the medium-term outlook, he stated. If the inflation outlook increased 3 percent, he revealed, the Fed would start tightening up its policy, even if the jobless rate has not fallen below 7 percent.
Evans’ remarks amounted to the strongest call yet for more monetary policy easing just weeks before the central banks’ policy-setting panel next meets, on November 1 and 2. Fed Chairman Ben Bernanke is slated to speak Tuesday.
The U.S. economy has remained very anemic this year, despite its hopes for a pick-up in the pace of expansion. Gross Domestic Product has expanded under 1 percent in the first half of this year, while unemployment has remained stuck above 9 percent for the past several months.
This scenario, accompanied by financial market strains stemming from Europe, have kept the pressure on the Fed to continue providing support to the economy, even though its already unprecedented effort to that effect in response to the Great Recession.
The Fed has not only slashed its benchmark interest to effectively zero, but has also purchased some $2.3 trillion in government and mortgage-backed securities to help support a very fragile recovery.
If the Fed is to adopt a policy trigger tied to the unemployment rate, Evans stated, he would also favor adopting a more formal inflation target of 2 percent to further cement expectations.
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