The debate, between Chicago Fed President Charles Evans and
Philadelphia Fed President Charles Plosser, underscored a
fundamental disagreement over the central bank's optimal approach to
policy under new Fed Chair Janet Yellen.
To Evans, one of the Fed's most dovish policymakers, allowing
inflation to run above the Fed's 2-percent target would be a small
price to pay for bringing the U.S. economy back to full employment
quickly, and could even signal the Fed's commitment to making good
on its goals.
To Plosser, an ardent policy hawk, letting inflation rise above the
target would call into question the Fed's commitment to its goals,
undermining its policy effectiveness.
How the debate plays out could have a huge impact on the course of
Fed policy as Yellen prepares to chair her first policy-setting
meeting next month, particularly as policymakers debate ways to
retool a low-rate promise that both hawks and doves see as in need
of a serious overhaul.
Under Yellen's predecessor Ben Bernanke, the Fed used massive
bond-buying programs and a promise to keep rates low to boost the
economy despite having already slashed the main policy rate to near
But with unemployment still too high and inflation undesirably low,
Evans said on Friday the U.S. central bank's policy-setting Federal
Open Market Committee is still falling short on both of its goals.
"If anything, the FOMC has been less aggressive than the policy loss
function might admit," Evans told the University of Chicago's Booth
School of Business conference on monetary policy in New York.
The Fed has made it clear that an unemployment rate of about 5.5
percent and an inflation rate of about 2 percent are indicative of a
healthy economy, he said. Bringing the economy back to health slowly
poses risks because of the chance of intervening policy shocks,
"The surest and quickest way to get to the objective is to be
willing to overshoot in a manageable fashion," Evans said. "With
regard to our inflation objective, we need to repeatedly state
clearly that our 2 percent objective is not a ceiling for
Speaking after Evans on the same panel, Philadelphia Fed chief
Plosser warned that if the Fed fails to treat its guidance as goals,
its credibility will fall by the wayside and so will its policy
The Fed has promised to keep interest rates near zero until well
past the time that the unemployment rate reaches 6.5 percent, as
long as inflation does not threaten to rise above 2.5 percent.
With the U.S. jobless rate now at 6.6 percent, the Fed's
unemployment threshold has become irrelevant, Plosser said. That's
an assessment with which Evans has said he agrees.
But, Plosser added, the public could also come to doubt the Fed's
seriousness about its inflation safeguard.
"In other words," he said, "by allowing the unemployment threshold
to pass without taking action, the public might conclude that the
Committee could easily decide to let the inflation threshold pass
without taking action as well."
To Plosser, that would be problematic. The Fed must have "some
degree of commitment to abide" by its promises, Plosser said on
Friday: too much flexibility could undermine the Fed's policies.
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Meanwhile another top Fed official on Friday said concern that loose
monetary policy was fueling financial instability was not a pressing
issue and that there was enough slack in the economy to give the
U.S. central bank two to three years to mull the problem.
"We don't need this theory to be able to make decisions in March of
2014," Minneapolis Federal Reserve Bank President Narayana
Kocherlakota said in a reference to growing concerns among his
colleagues that loose monetary policy could be fueling financial
The economy remains weak, he said, so "I think we have two to three
years to be thinking of this problem."
After more than five years of super-easy monetary policy in the wake
of the 2007-2009 recession, the Fed is taking the first small steps
toward a more normal interest-rate environment. It trimmed its
bond-buying program by $10 billion in each of the past two months,
and it expects to raise interest rates sometime next year as long as
the economy continues to improve.
Recent bad weather in large portions of the United States has slowed
economic growth recently, but top Fed officials remain optimistic
about economic prospects.
Even if the recent spate of soft data is entirely unrelated to
weather, St. Louis Federal Reserve President James Bullard told CNBC
television on Friday he is still optimistic about the economic
"I'd still project that 2014 would have stronger GDP growth than
2013 did and I'd still project that inflation would come back to
target," Bullard said.
On Thursday, Yellen attributed much of the recent weak economic data
to bad weather and suggested that only a significant change in the
economic outlook would drive the Fed to reconsider its plan to wind
down its massive bond-buying program this year.
Dallas Fed President Richard Fisher, speaking in Zurich on Friday,
wholeheartedly embraced that plan.
"As soon as feasible, the Federal Reserve should stop large-scale
asset purchases entirely," said Fisher, who has a vote on the Fed's
policy panel this year.
The Texan is one of the most outspoken opponents of the current
round of bond buying, which has swollen the Fed's balance sheet to
more than $4 trillion.
(Reporting by Susan Heavey, Jason Lange,
Bill Trott, Alice Baghdjian and Katharina Bart; Writing by Ann
Saphir; Editing by Andrea Ricci and Meredith Mazzilli)
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