Divisions within the Federal Reserve about the merits of using more quantitative easing to boost the economy have been laid bare in divergent speeches by the presidents of three regional Federal Reserve banks.
Eric Rosengren of Boston, Narayana Kocherlakota of Minneapolis and Charles Plosser of the Philadelphia Fed took different positions on everything from the inflation outlook to the effectiveness of quantitative easing – which means pushing cash into the economy by buying long-term assets – in boosting economic growth.
At its September meeting the Fed’s rate-setting Open Market Committee signalled that it was looking at taking further action because inflation was below its comfort zone and the economy was not growing fast enough to bring down a 9.6 per cent unemployment rate.
Differing views in the FOMC will shape the size and format of any new programme of quantitative easing but they do not mean the committee is likely to be deadlocked. The FOMC is likely to support Ben Bernanke, Federal Reserve chairman, if he judges that further QE is necessary at the Fed’s next meeting in November.
Mr Rosengren signalled his support for further quantitative easing. He said monetary policy should respond to a slow recovery “vigorously, creatively, thoughtfully and persistently, as long as we have options at our disposal”.
“While the economy is growing, it is currently growing too slowly to significantly reduce the unemployment rate or stem disinflationary pressures created by the high decree of slack in the economy,” Mr Rosengren said.
Speaking to the Financial Times, Mr Rosengren said the right amount of assets to purchase “is going to be situational”, and should depend on the economic outlook.
By contrast, Mr Kocherlakota gave no hint of his attitude towards further asset purchases but highlighted uncertainty about the effects of QE. “My own guess is that further uses of QE would have a more muted effect on Treasury term premia,” he said.
Mr Kocherlakota said that he expected PCE inflation, the Fed’s preferred measure of core inflation, to bounce back to a range of 1.5-2 per cent in 2011 – a level the Fed would probably be comfortable with.
Mr Plosser said he was opposed to further asset purchases at this time, saying attempts to “fine-tune” the economy in this way were a threat to the Fed’s credibility.
“It is difficult, in my view, to see how additional asset purchases by the Fed, even if they move interest rates on long-term bonds down by 10 or 20 basis points, will have much impact on the near-term outlook for employment,” Mr Plosser said.
He said he would support further asset purchases if public expectations of inflation were to fall. But he expected core inflation to be 1-1.5 per cent and then “accelerate toward 2 per cent in 2011”.
There were also differing diagnoses of why unemployment remained so high. Mr Kocherlakota has previously talked of “mismatches” between workers’ skills and geographic location compared with demand from employers.
Mr Rosengren said this recession had been marked by job losses in almost every industry.
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