WASHINGTON (Reuters) – The U.S. Federal Reserve’s latest bond-buying stimulus plan threatens the central bank’s credibility and raises the risk of future inflation, Richmond Fed Bank President Jeffrey Lacker said on Friday.
Lacker, a vocal inflation hawk who dissented at every Fed policy meeting last year, held his ground on opposing the decision to purchase $85 billion per month in mortgage and Treasury bonds until the employment outlook improves.
Gabriel Debenedetti contributed to this post
Federal Reserve officials appear to be getting cold feet. Having just announced an open-ended bond buying program in September and then broadening it in December, minutes from last month’s policy meeting suggested an increasing caution about additional monetary stimulus among the Federal Open Market Committee’s core of voting members.
Several (members) thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet.
WASHINGTON (Reuters) – Federal Reserve officials are increasingly concerned about the potential risks of the U.S. central bank’s asset purchases on financial markets, even if they look set to continue an open-ended stimulus program for now.
In a surprise to Wall Street, minutes from the Fed’s December policy meeting, published on Thursday, showed a growing reticence about further increases in the central bank’s $2.9 trillion balance sheet, which it expanded sharply in response to the financial crisis and recession of 2007-2009.
WASHINGTON (Reuters) – Federal Reserve officials are increasingly concerned about the potential risks of its asset purchases on financial markets, but look set to continue its open-ended stimulus program for now.
Minutes from the Fed’s December policy meeting showed a growing reticence about further increases in the central bank’s $2.9 trillion balance sheet, which it expanded sharply in response to the financial crisis and recession of 2007-2009.
Are the world’s top central bankers too paranoid about inflation? As the United States struggles to sustain a weak recovery while the euro zone and Japan face outright contractions in output, a number of economists have called for the monetary authorities to be less dogmatic about adhering tightly to low inflation targets.
Most prominently, IMF chief economist Olivier Blanchard has argued the Federal Reserve’s 2 percent inflation target is too low given the severity of the loss of employment and growth that followed the Great Recession of 2008-2009. Kenneth Rogoff, co-author of an oft-cited study of economic downturns following financial crises called “This Time is Different,” has also championed greater inflation tolerance.
The U.S. jobless rate, currently at 7.7 percent, remains elevated by historical standards. But it has fallen sharply from a peak of 10 percent in October 2009. However, that decline could soon grind to a halt, according to a recent paper from the San Francisco Federal Reserve.
Its authors argue that, because the slow but steady decline in the jobless rate has been in part due to slippage in the labor participation rate that is more a product of the business cycle than long-run demographic trends, as the Bureau of Labor Statistics presumes.
Federal Reserve Chairman Ben Bernanke spoke to reporters for well over an hour at his quarterly press conference this week, but he was vague on the most important question of monetary policy today: what exactly would it take for the central bank to either ramp up or curtail the pace of monthly asset purchases? Since bond buys have effectively replaced interest rates as the dominant tool of Fed policy in recent years, the central bank’s new thresholds, which reference only rates, are not particularly useful.
After all, in the original threshold plan as crafted by its inventor, Chicago Fed President Charles Evans, the Fed would offer a jobless rate trigger for quantitative easing itself.
Updates with Fed decision
The Federal Reserve on Wednesday took the unprecedented step of tying its low rate policy directly to unemployment, saying it will keep rates near rock bottom until the jobless rate falls to 6.5 percent. That’s as long as inflation, the other key parameter of policy, does not exceed 2.5 percent.
Jan Hatzius, chief economist at Goldman Sachs, however, said in a research note published ahead of the decision that the shift may not be very effective.
It’s a curious pattern being repeated around the industrialized world. Governments are trying frantically to tighten their belts even as the monetary authorities loosen their purse strings. This week in the United States is a perfect example: the Fed looks set to extend its bond purchase program even as Washington fails to reach an agreement to avoid the dreaded “fiscal cliff.”
It’s the sort of dissonant policy that is unlikely to yield very constructive results at a time when the U.S. economy is struggling to achieve a meager 2 percent growth rate.
WASHINGTON (Reuters) – The Federal Reserve is expected to announce a fresh round of bond buying on Wednesday as part of its efforts to support a fragile economic recovery threatened by political wrangling over the government’s budget.
The central bank looks certain both to extend its purchases of mortgage-backed debt and replace another expiring stimulus program with a new bout of money creation.