Fed officials signal broad support for doing more

[September 22, 2012]  WASHINGTON (AP) -- Several Federal Reserve officials made clear this week that Chairman Ben Bernanke commands broad support for the Fed's plan to continue stimulating the economy if hiring doesn't pick up.

As Vice Chairman William Dudley put it in a speech: "If you're trying to get a car moving that is stuck in the mud, you don't stop pushing the moment the wheels start turning -- you keep pushing until the car is rolling and clearly free."

Last week, the Fed said it would spend $40 billion a month to buy mortgage bonds to try to make home buying more affordable. It left open the possibility of taking other steps. And it signaled that the economy would receive help from the Fed even after the recovery strengthens.

On Friday, Dennis Lockhart, president of the Atlanta Federal Reserve Bank, stressed that the new round of bond purchases would continue until the job market improves, and "if we do not see improvement, more action may be taken."

In a speech Thursday, Eric Rosengren, president of the Boston Federal Reserve Bank, said he was pleased that the Fed's policy committee was "willing to take difficult actions like these rather than accept the possibility of a long, slow recovery turning into a stagnation that someday earns the dubious title of 'Great.' "

Dudley and Rosengren have been leading voices among the officials who favor aggressive intervention to combat chronic high unemployment.

A smaller group of Fed officials have expressed concern that continued stimulative action by the Fed is elevating the risk of high inflation later.

Jeffrey Lacker, president of the Richmond Fed, has been a leader of this group, often described as inflation "hawks." Lacker was the lone dissenter in the Fed's 11-1 vote to launch a bold new stimulative program. He has cast the only dissenting vote at all six Fed meetings this year. Besides expressing concern about inflation, Lacker has argued that the Fed's moves would likely do little to boost growth.

This week, in a potentially significant shift, Narayana Kocherlakota, president of the Minneapolis Fed and long regarded as a hawk, signaled that he has grown more concerned about economic growth. In a speech Thursday, Kocherlakota said the Fed should fight high unemployment with an even more aggressive approach than it announced last week.

The Fed said it planned to keep short-term interest rates at record lows at least through mid-2015. But Kocherlakota said the Fed should keep the record-low rates until unemployment, now at 8.1 percent, falls below 5.5 percent -- something he said might take four or more years to achieve.

Laurence Meyer, a former Fed board member and now an economist with Macroeconomic Advisors, said in a research note that Kocherlakota's statement was "one of the most dramatic shifts in policy positions" in Fed history.

Economists saw the Fed officials' remarks this week as an effort to underscore their resolve to combat unemployment. Some of those who spoke out -- such as Rosengren and Kocherlakota -- are not voting members of the Fed's policy committee this year. But they still take part in committee discussions and can influence other officials.

The policy committee will next meet Oct. 23-24. Most analysts say they don't expect any policy change then, given the major steps the Fed took this month and the fact that the October meeting is so close to the presidential election.

But some say the Fed might decide to do more at its last meeting of the year Dec. 11-12. David Jones, chief economist at DMJ Advisors, thinks that if growth doesn't rise significantly by December, the Fed might decide to buy more than the $40 billion in mortgage bonds it's begun to purchase each month.

Still, Jones cautioned that the Fed would need to avoid intervening too aggressively. If bond investors began to worry about inflation, long-term rates would likely rise. That would mean higher borrowing costs across the economy.

"All of this could have a boomerang effect," Jones said. "It could hurt the Fed's anti-inflation credibility."

Among those who express such concern is Richard Fisher, president of the Dallas Fed and an ally of Lacker's in the anti-inflation camp. Fisher said this week that if he had had a vote on the policy committee this year, he would have opposed the Fed's latest moves.

"I do not see an argument for letting inflation rise to levels where we might scare the market," Fisher said in an interview with Bloomberg radio.

[Associated Press; By MARTIN CRUTSINGER]

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