Tags: Plosser | Evans | U.S. | bank | Bernanke

Fed Taps Plosser, Evans to Look at Communications

Tuesday, 20 Sep 2011 12:49 AM

 

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Two top Federal Reserve officials with widely divergent views have been asked by Fed Chairman Ben Bernanke to examine how the U.S. central bank could improve the way it communicates its policy goals, a Fed official said on Monday.

Bernanke has asked Philadelphia Federal Reserve Bank President Charles Plosser and Chicago Fed President Charles Evans to work with Vice Chair Janet Yellen in looking at how the central bank could better explain its goals to the public.

One issue the group is likely to study is what changes to unemployment and inflation it would take to make the Fed lift its commitment to ultra-low rates and extra-accommodative monetary policy, the official confirmed. The existence of the working group was first reported by the Wall Street Journal.

With the U.S. economic recovery at risk of stalling, Bernanke expanded a scheduled one-day September meeting to two to consider what options the Fed has to boost growth. The central bank cut benchmark short-term rates to near zero almost three years ago and has bought $2.3 trillion in longer term securities in a further effort to lower borrowing costs.

Any fresh initiatives would be new or untested.

The Fed is expected to announce at the end of its two-day meeting on Wednesday plans to adjust its massive $2.8 trillion balance sheet to weight it more heavily to longer-term securities in a bid to lower longer-term interest rates.

It had emphasized purchases of Treasuries in the two- to 10-year range in its so-called quantitative easing programs that ended in June.

Analysts expect the Fed this week will turn its focus to the five- to 15-year range, either through a program that replaces maturing securities or one which actively sells shorter-term debt to more aggressively re-balance the portfolio.

The U.S. economy expanded at less than a 1 percent annual rate in the first six months of the year, and analysts expect growth to be soft in the second half of the year as well.

Europe's economic crisis, a U.S. debt downgrade after a bruising political fight over raising the nation's borrowing limit, and persistently high U.S. unemployment and home foreclosure rates have undermined business and consumer confidence.

As expectations for a solid economic rebound in the second half of the year dimmed, the Fed began to consider additional tools to spur borrowing and investing.

At a meeting on August 9, policymakers debated whether they should tie the path of interest rates to either unemployment or inflation. In the end, officials decided to tell markets they expected to keep the overnight federal funds rate low at least until the middle of 2013, but some Fed officials chafed at offering a time-related commitment and three dissented.

Plosser, who as recently as late-July had been saying a tightening in monetary policy might be needed by year end, is an inflation "hawk" and long-time advocate of the Fed setting a specific numerical inflation target. He was one of the dissenters.

Evans, in contrast, has said the Fed should consider an aggressive easing of monetary policy. He has also recommended a commitment to keep rates low until unemployment falls to 7.5 percent or lower, as long as inflation stays below 3 percent.

An approach that sets explicit targets for economic conditions would serve the twin goals of increasing transparency about the aims of policy and requiring only a verbal commitment rather than outright asset purchases, which have proven controversial.

© 2014 Thomson/Reuters. All rights reserved.

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