Three Federal Reserve regional presidents reinforced the idea that policy makers will start a second round of unconventional monetary stimulus, with two saying asset purchases must be big enough to aid the economy.
Chicago Fed President Charles Evans said the central bank would need to buy securities on a large scale several times to carry out his preferred strategy of aiming to raise inflation temporarily. Atlanta Fed President Dennis Lockhart said in a CNBC interview that a pace of $100 billion of purchases a month is “in the range of numbers one might consider.”
Separately, William Dudley, New York Fed president and vice chairman of the central bank’s policy-setting Open Market Committee, said his Oct. 1 assertion that officials will probably need to add stimulus “still stands.” While Evans and Lockhart don’t have FOMC votes this year, all three presidents have aligned in prior decisions with Fed Chairman Ben S. Bernanke, who said Oct. 15 that that there appears to be a “case for further action.”
“They wouldn’t be talking about it in such a way if they weren’t on the verge of engaging in another round of asset purchases,” said Tom Porcelli, an economist at RBC Capital Markets Corp. in New York who formerly worked on the New York Fed’s markets desk.
Two other Fed bank presidents, Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis, continued to express skepticism about the efficacy of further asset purchases. Fisher said policy makers are still debating the issue and may not make a decision next month.
“We have not committed to quantitative easing,” Fisher, who doesn’t vote on policy this year, told reporters after a speech in New York. “The markets may be making certain assumptions, but a discussion has not yet taken place” and “may not even be finished on Nov. 3,” the second day of the FOMC’s next meeting.
Porcelli said he expects the Fed after the meeting will announce the resumption of asset buying in a “piecemeal approach” that will eventually accumulate to $1 trillion in purchases. The Fed bought $1.7 trillion of Treasuries and mortgage debt through March.
Fed officials are debating whether and how they can boost growth that’s too slow to bring down unemployment persisting near a 26-year high. The FOMC said in its last statement Sept. 21 that inflation was “somewhat below” levels consistent with the Fed’s legislative mandates for stable prices and maximum employment in the long run.
Evans, 52, a 19-year Fed veteran who became president in 2007, reiterated his support for “price-level targeting,” in which the Fed would commit to higher inflation for a time to make up for inflation that was too low.
“Price-level targeting in the current environment would call for a series of large-scale asset purchases to recover the shortfall in inflation,” Evans said in a speech today in Evanston, Illinois.
Evans told reporters after the speech that asset purchases “would have to be meaningful” in size while declining to say the amount he would support.
Lockhart, 63, who joined the Atlanta Fed as its chief in 2007, said on CNBC that he’s “leaning in favor” of supporting asset purchases and that “it has to be a large enough number to really make a difference.”
“I don’t think it makes sense to do small portions of quantitative easing,” he said.
Dudley said in an Oct. 1 speech that $500 billion of purchases, for example, would add as much stimulus as reducing the Fed’s benchmark rate 0.5 percentage point to 0.75 percentage point, depending on how long investors expect the Fed to hold the assets. The central bank lowered its benchmark rate to near zero in December 2008 and has pledged to keep it low for an “extended period.”
The U.S. unemployment rate is “unacceptably high” and inflation is “too low,” Dudley, 57, said to reporters today, affirming the points of the prior speech. “I feel very comfortable with what I said on Oct. 1,” he said during a press briefing on the regional economy at the New York Fed.
Dudley said in prepared remarks to the media that slowing growth, “weak” job creation and declining inflation add up to a “wholly unsatisfactory” U.S. economy.
Later today, Fed Governor Elizabeth Duke speaks to finance- industry professionals in New York. Tomorrow the Fed releases the Beige Book regional business survey, offering an anecdotal snapshot of the U.S. economy.
Fisher, in his New York speech, said that “the efficacy of further accommodation using nonconventional policies is not all that clear.”
Kocherlakota, speaking today in Fargo, North Dakota, repeated that with financial markets functioning better now than in early 2009, “my own guess is that further uses of QE would have a more muted effect” on narrowing the gap between longer and shorter-term Treasury yields.
“What will we likely decide at the next FOMC meeting?” Fisher said in his speech. Referring to baseball playoff games between the Texas Rangers, based near Dallas, and the New York Yankees, Fisher said, “as with the American League championship, you’ll find out when it’s over and only then.”
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