Fed hawks press their minority case against easing

Fri Nov 16, 2012 10:41am IST

A view shows the Federal Reserve building on the day it is scheduled to release minutes of the Federal Open Market Committee from August 1, 2012, in Washington August 22, 2012. REUTERS/Larry Downing/Files

A view shows the Federal Reserve building on the day it is scheduled to release minutes of the Federal Open Market Committee from August 1, 2012, in Washington August 22, 2012.

Credit: Reuters/Larry Downing/Files

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REUTERS - The Federal Reserve's most hawkish policymakers were out in force on Thursday to criticize as misguided and risky the central bank's aggressive attempts to boost the U.S. economic recovery.

In speeches around the country, three regional Fed presidents ticked off their reasons for opposing the U.S. central bank's current and possibly massive round of large-scale asset purchases, including the risk of inflation and the prospect of letting politicians off the hook for inaction on the economy.

Many of these concerns have been raised in the past. But Thursday's speeches by the so-called hawks - who generally worry about a run-up in inflation - illustrated the resistance that Fed Chairman Ben Bernanke and the other officials who constitute a majority face at their closed-door policy-setting meetings.

"The extraordinary policies the Fed has pursued pose substantive longer-term risks: these include moral hazard, future inflation, and loss of institutional credibility," Charles Plosser, president of the Philadelphia Federal Reserve Bank, said in Washington.

Jeffrey Lacker, the head of the Richmond Fed, who has cast a dissenting vote at every policy meeting this year, said the current anemic but ongoing recovery does not justify more stimulus by the U.S. central bank.

"We should be standing pat now rather than easing policy further," Lacker told the West Virginia Economic Outlook conference. "It's not clear whether monetary policy, by itself, can bring about any material improvement in economic growth right now."


Even so, Bernanke in a speech on Thursday highlighted lingering weakness in the housing market, a key component in the economic recovery that he said the Fed aimed to help.

"Although there are good reasons to be encouraged by the recent direction of the housing market, we should not be satisfied with the progress we have seen so far," Bernanke told the Operation HOPE Global Financial Dignity Summit in Atlanta.

Minutes of the Fed's October policy meeting suggested that the doves - Fed officials more concerned with lowering the lofty unemployment rate than with inflation risk - still hold sway.

A number of officials felt the central bank would need to step up asset purchases in 2013 to fill the gap when the program known as Operation Twist expires, according to the minutes released on Wednesday that hardened expectations the Fed will take such a decision next month.

Under Operation Twist, which expires at year end, the Fed has been selling short-term securities to buy $45 billion in longer-term debt every month to push down long-term borrowing costs.

In September, the Fed launched its third round of quantitative easing, dubbed QE3, in which it also buys $40 billion per month in mortgage-backed securities until the labor market outlook improves substantially.

Meanwhile, the Fed's key interest rate has been near zero since late 2008 to battle the worst recession in decades. In a sign of how wide is the range of thinking among the 19 policymakers, Fed Vice Chair Janet Yellen on Tuesday backed keeping the rate that low through 2016.


In Palo Alto, California, Dallas Fed President Richard Fisher highlighted the risk that overly aggressive policies such as buying bonds without limit will allow U.S. lawmakers avoid tackling the nation's pressing budget and fiscal problems.

"Only the Congress of the United States can now save us from fiscal perdition. The Federal Reserve cannot," Fisher said at a conference at Stanford University.

Lawmakers are struggling to cut a budget deal to avoid the so-called fiscal cliff of big tax increases and spending cuts set to begin January 1. If nothing is done, the United States faces another recession.

Fisher saved his sharpest criticism - and most colorful metaphor invoking both a popular children's movie character and a philosophical phrase dating from the 17th century - to warn against monetary policy that tries to do too much.

"We dare not become the central bank counterpart to Congress," he said, "by adopting a Buzz Lightyear approach of 'To infinity and beyond!' by endlessly purchasing U.S. Treasuries and agency debt so as to encumber future generations of central bankers with Hobson's choices when it comes to undoing what seems contemporarily appropriate."

Bernanke in his speech on Thursday steered clear of specifics on policy, but said the Fed will continue to do what it can to support that sector of the economy.

Beyond QE3, Fed policymakers are also hotly debating whether to adopt so-called thresholds that would tell the world when they finally plan to raise interest rates. Based on the plans pitched by some, the thresholds could be unemployment and inflation levels.

But Plosser, who sits on a Fed communications committee, warned it would be difficult to choose the numerical thresholds, arguing such an approach could cause long-lasting confusion.

Rounding out the flurry of activity on Thursday, William Dudley, the dovish president of the Federal Reserve Bank of New York, took to the podium to discuss what he called slow but promising progress regulators have made to tackle the "too big to fail" bank problem.

Simply breaking up such banks - as Fisher has repeatedly advocated - is not yet the answer, Dudley said in New York.

(Additional reporting by Pedro da Costa in Charleston, W.Va.,; Alister Bull in Washington, D.C.; Ann Saphir in Palo Alto, Calif.; and Karen Jacobs in Atlanta; Editing by Leslie Adler and Eric Walsh)



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