Two Fed Skeptics of QE Say Inflation Underscores Program Risks

Wednesday, 09 Feb 2011 06:24 AM

 

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Two Federal Reserve Bank presidents skeptical about the Fed’s $600 billion bond-buying program said the prospect of accelerating inflation underscores the risk from a record increase in the central bank’s balance sheet.

Richmond Fed President Jeffrey Lacker said yesterday policy makers need to take “quite seriously” their commitment to review the program as the U.S. recovery quickens. The Dallas Fed’s Richard Fisher, who votes this year on the policy-setting Federal Open Market Committee, said the central bank is “pushing the envelope” with its purchases and that he’d oppose any proposal to do more.

The comments show Chairman Ben S. Bernanke may face opposition to stepping up the stimulus should he deem it necessary before the purchases end as scheduled in June, or to completing the program if the economy speeds up. The FOMC voted last month to press ahead with so-called quantitative easing to spur growth and create jobs, even after sparking the harshest political backlash in three decades.

Lacker, speaking in Newark, Delaware, said reviewing the monetary stimulus “will be challenging, because inflation is capable of accelerating, even if the level of economic activity has not yet returned to pre-recession trend.”

Fisher, in a Dallas speech yesterday, also flagged the prospect of inflation.

“I will be at the forefront of the effort to trim back our Treasury holdings and tighten policy at the earliest sign that inflationary pressures are moving beyond the commodity markets and into the general price stream,” he said.

Round Two

Fed policy makers in November announced a second round of asset purchases to reduce borrowing costs. The program followed the $1.7 trillion of purchases of mortgage and government debt that ended in March 2010.

Atlanta Fed President Dennis Lockhart said yesterday in Anniston, Alabama, that while concerns about the durability of the recovery are “justified,” he expects the purchases to end as schedule in June.

“My working assumption is the schedule of purchases, as stated, is going to be held to closely,” Lockhart told reporters after his speech.

Neither Lockhart nor Lacker votes this year on the FOMC.

“The distinct improvement we’ve seen in the economic outlook since the program was initiated suggests taking that re- evaluation quite seriously,” Lacker said. Replying to a question during a panel discussion, he said that while the program shouldn’t end now, a halt may be warranted if job growth strengthens and gains in consumer spending persist.

‘Close Call’

“I’m not ready to stop it right now, but I think it was widely recognized that it was a close call as to the costs and benefits,” Lacker, 55, said at an economic-forecasting forum at the University of Delaware. “Growth has come in stronger, at least for me, than I was expecting over the last couple of months.”

Speaking with reporters afterward, Lacker declined to say whether the Fed is likely to halt the purchases or phase them out. There are a “lot of options,” he said.

Lacker and Fisher are among a minority of Fed policy makers who have voiced skepticism about the asset purchases. The Fed has said it will regularly review the pace and size of its stimulus.

Fisher said in response to questions from reporters that he expects the Fed to complete the announced purchases and that he opposes any expansion of the program.

‘New Information’

“I would not vote for another round of quantitative easing,” said Fisher, who voted in support of the FOMC’s Jan. 26 decision to press ahead with the purchases. “Unless we receive new information, I would dissent against any further programs.”

The U.S. economy will display “noticeably stronger growth” this year and the inflation outlook is “benign,” Lacker said. He projected price increases this year of 1.5 to 2 percent, and U.S. growth “pretty close to 4 percent.”

The Standard & Poor’s 500 Index gained 0.4 percent yesterday to 1,324.57. The index has risen more than 10 percent since Nov. 3, when the bond purchases were announced. Yields on 10-year Treasurys rose 11 basis points to 3.74 percent, according to data compiled by Bloomberg, and were up from 2.57 percent on Nov. 3.

Risks to the economy include a “depressed” housing market along with foreclosures and a high inventory of vacant homes, Lacker said. At the same time, the industry represents about 2 1/4 percent of U.S. output, “so the damage this sector is capable of inflicting is in some sense limited,” he said.

Lockhart said concern about the U.S. economy is warranted as hiring lags behind economic growth.

‘Top Concern’

“Main Street is justifiably concerned today about the sustainability of the modest recovery that’s been under way now for six quarters, the persistence of high unemployment and the specter of inflation,” Lockhart said. Unemployment remains a “top concern” and job growth has been “frustratingly slow.”

Unemployment declined to 9 percent in January from December’s 9.4 percent, the Labor Department said Feb. 4. Employers added 36,000 workers, short of the 146,000 median gain projected in a Bloomberg News surveyed of economists, as winter storms deterred hiring. The two-month decline in the jobless rate, which was 9.8 percent in November, was the biggest since 1958.

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