* Aggressive central bank prepared to buy assets as needed
* Monitoring all corners of ailing labor market -Dudley
* QE3 will strengthen economy, make it more resilient -Evans
* Fisher says new bond-buying will be ineffective
(Adds Bullard comments)
By Ann Saphir and Jonathan Spicer
ANN ARBOR, Mich./FLORHAM PARK, N.J., Sept 18 (Reuters) – The
Federal Reserve will not waver from its aggressive policy stance
when one of its two bond-buying programs expires at year end,
and it is prepared to do even more to get Americans back to
work, two Fed officials said on T ues day.
The U.S. central bank, which last week launched a
potentially massive policy-easing effort with no set end date,
will closely watch the ailing labor market for meaningful signs
of improvement, the Fed policymakers said.
In response to lackluster economic growth that has not been
enough to drive the unemployment rate down from levels above 8
percent, the Fed headed deeper into uncharted policy territory
with a third round of quantitative easing, or QE3.
William Dudley, president of the New York Federal Reserve
Bank, said the economy needed a “nudge in the right direction,”
while Charles Evans, head of the Chicago Fed, predicted the
central bank will keep buying assets at its current $85
billion-per-month pace into the new year.
“If the economy is weaker, we’ll do more” asset purchases,
said Dudley, a close ally of Fed Chairman Ben Bernanke and a key
barometer of the thinking inside the central bank. “If the
economy is stronger and we see a substantial improvement in the
outlook for the labor market sooner, we’ll end up doing less.”
Dudley, addressing the Morris County Chamber of Commerce in
New Jersey, added: “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 is
clearly free.”
Last week the Fed said it plans to buy $40 billion every
month in mortgage-backed securities until the labor market
outlook improves substantially.
The purchases come on top of an existing stimulus program in
which the central bank buys about $45 billion a month in
long-term Treasuries while selling the same amount of short-term
Treasuries. That program, dubbed Operation Twist and designed to
drive down long-term borrowing rates such as mortgages, runs
through the end of 2012.
Evans, who has long advocated such aggressive action by the
Fed, said he would be surprised if there is enough evidence by
year-end to halt Treasury purchases altogether.
“Under those conditions, I would expect we would continue
with something like an $85 billion base of purchases … that’s
a benchmark to start from,” he told reporters after a speech in
Ann Arbor, Michigan.
The Fed in late 2008 slashed interest rates to near zero and
has since bought $2.3 trillion in securities in an unprecedented
drive to spur growth and revive the economy after the worst
recession in decades. Yet the recovery, especially in jobs, has
been slow, leading the central bank to say it expects to keep
rates at rock bottom at least through mid 2015.
Wall Street economists have been trying to pinpoint exactly
what conditions would constitute a “substantial” improvement in
the outlook for the labor market, which the Fed last week
suggested would halt the new money-printing program.
Addressing this question, Dudley said the Fed will watch all
corners of the labor market, including payroll growth, the
number of Americans who have given up the hunt for work, the
employment-to-population-ratio and job-finding rates, as well as
the broader measure of unemployment.
At year end, further purchases of Treasuries will depend on
an assessment of costs and benefits and on labor improvement,
said Dudley, who as head of the important New York regional Fed
bank has a permanent vote on Fed policy.
Ultimately, the Fed is looking for a stronger recovery
alongside stable prices, said Dudley. “When that finally
materializes, I’ll view it as consistent with the result we are
trying to achieve, and not a reason to pull back our policies
prematurely,” he added.
INTERNAL POLICY RIFTS
Fed policymakers broadly agree that U.S. unemployment is
much too high; most also agree that inflation, which has hovered
near the Fed’s 2 percent target, is well under control. But
there continue to be deep rifts within the central bank over the
best policy response.
Dallas Fed President Richard Fisher, a forceful opponent of
further easing, said he would have dissented last week if he had
a vote on the bank’s policy-setting Federal Open Market
Committee this year.
“I would argue that it is less impactful right now because
you have other things inhibiting businesses from making
decisions on capex and employment,” Fisher told CNBC. “I don’t
think this program will have much efficacy.”
James Bullard, president of the St. Louis Fed, expressed a
similar sentiment. While he has been less skeptical than Fisher
about the use of bond buys as a stimulus option, Bullard told
Reuters he did not think the economic data sufficiently weak to
warrant the latest round of monetary easing.
“I would have voted against it based on the timing. I didn’t
feel like we had a good enough case to make a major move at this
juncture,” said Bullard, who is not a voter this year on the
Federal Open Market Committee.
“We should take a little bit more (of a) wait and see
posture. I think that constellation of economic data doesn’t
really dictate the decision that we made.”
Only one of the 12 Fed voting policymakers dissented against
QE3, which came very close to a plan Evans has advocated for the
past year: a vow to keep rates low until unemployment drops
below 7 percent or inflation threatens to top 3 percent, and to
buy bonds if progress on jobs is not fast enough.
“I am optimistic that we can achieve better outcomes through
more monetary policy accommodation,” Evans told a business
breakfast sponsored by the Bank of Ann Arbor. “This is the time
to act,” he said, adding that asset purchases could begin to
taper in 2014 if the labor market improves as he expects.
Evans cast the debate over monetary policy as one between
optimists who believe further easing can deliver a stronger
economy, and pessimists who say it will only spark inflation.
Pessimists have warned for years about higher inflation, only to
have their predictions fall short, he said.
Risks abound that could send the U.S. economy back into
recession, he said, citing a potential global slowdown,
spillover from Europe’s sovereign debt crisis and the looming
“fiscal cliff.”
“We cannot be complacent and assume that the economy is not
being damaged if no action is taken,” Evans said.
(Additional reporting by Lucia Mutikani in Washington and
Alister Bull in St. Louis; Editing by Chizu Nomiyama, Leslie
Adler and Dan Grebler)
