Fed Officials Voice Doubt on Inflation as Tool to Boost Growth

Two Federal Reserve policy makers voiced wariness about the idea of spurring growth by letting inflation accelerate as they reiterated support for the central bank’s unprecedented monetary easing.

Fed Governor Sarah Bloom Raskin said the central bank’s use of tools has been “completely appropriate” and that she would be “quite leery” of allowing higher inflation or price expectations in an attempt to lower real interest rates. St. Louis Fed President James Bullard said faster inflation won’t reduce the housing glut. He also said “monetary policy is ultra-loose right now, and appropriately so.”

Fed Chairman Ben S. Bernanke and colleagues have discussed adopting specific levels of inflation and unemployment as conditions for keeping interest rates near zero. Only Chicago Fed President Charles Evans has public supported the idea of allowing price increases faster than 2 percent annually as a way to lower unemployment.

“One of the explicit mandates of Congress is price stability, and keeping inflationary expectations anchored is, in my mind, extremely important,” Raskin, 50, said in response to an audience question yesterday in Washington after a speech to the University of Maryland’s Robert H. Smith School of Business.

The Federal Open Market Committee said Sept. 21 it will buy $400 billion of Treasury securities with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less.

Policy Tools

It was the second straight expansion of unconventional monetary tools, following the August decision to say the benchmark interest rate will stay close to zero until at least mid-2013 instead of the previous, less-specific “extended period” language that had been in place since March 2009.

Raskin indicated she might support unspecified further stimulus. While the effects of Fed actions have been “somewhat more muted than I might have expected,” she said, that shouldn’t imply that additional easing “would be unhelpful.”

“Indeed, the opposite conclusion might well be the case -- namely, that additional policy accommodation is warranted under present circumstances,” she said in a speech, her first devoted to monetary policy since the former Maryland chief financial regulator joined the Fed almost a year ago.

The FOMC at its Aug. 9 meeting considered conditioning its pledge to keep interest rates at record lows “on explicit numerical values for the unemployment rate or the inflation rate,” according to minutes released Aug. 30.

More Clarity

“Some members argued that doing so would establish greater clarity regarding the committee’s intentions and its likely reaction to future economic developments, while others raised questions about how an appropriate numerical value might be chosen,” the minutes said.

The commitment should be contingent on joblessness falling to around 7 percent or 7.5 percent as long as inflation stays below 3 percent in the medium term, Evans said Sept. 7. Fed policy makers aim for long-run inflation of about 1.7 percent to 2 percent.

Bullard, 50, referring to unsold homes, said yesterday that “I’m not sure inflation is really going to help you work that off.”
Keeping prices stable “is the way to go here,” Bullard, who doesn’t vote on monetary policy this year, said at a forum in New York hosted by Medley Global Advisors and the Financial Times. “I don’t think high inflation is a very good solution to this problem.”

Economic Changes

Bullard repeated that he favored a “meeting-by-meeting approach” to setting the size of asset purchases so a program’s size responds to changes in the economy.
U.S. stocks rose, with the Standard & Poor’s 500 Index increasing 2.3 percent to 1,162.95 in New York trading, as European officials discussed ways to tame the region’s debt crisis. Yields on 10-year Treasury notes rose seven basis points, or 0.07 percentage point, to 1.9 percent as of 5:50 p.m. in New York.

One drawback to the commitment to keep the benchmark rate near zero is that it “may encourage a Japanese-style outcome in which the policy rate simply remains near zero and markets come to expect a mild rate of deflation,” Bullard said in his presentation yesterday.

The so-called Operation Twist announced last week “should exert downward pressure on longer-term interest rates and help make broader financial conditions more accommodative, thereby supporting a stronger economic recovery,” Raskin said, reiterating a point from the FOMC’s statement. The FOMC cited “significant downside risks to the economic outlook, including strains in global financial markets.”

The Fed also agreed to switch the reinvestment of its holdings of maturing housing debt to mortgage-backed securities from Treasuries.

“Our announcement appears to have been successful in narrowing the spread between rates on agency MBS and Treasury securities of comparable maturity,” which had “widened substantially since earlier this year,” threatening to raise home-loan costs, Raskin said yesterday, referring to mortgage- backed securities.(Bloomberg)