Less Need for Easing: Fed Officials

Four Fed bank presidents speak out against additional accommodation.

Four Federal Reserve regional bank presidents who vote on monetary policy this year see less of a need for the Fed to spur the economy with new accommodation.

“The probability of needing to do additional stimulus is lower,” San Francisco Fed President John Williams told reporters yesterday. Cleveland’s Sandra Pianalto, Atlanta’s Dennis Lockhart and Richmond’s Jeffrey Lacker also spoke against additional accommodation this week, with Lacker saying yesterday he “was surprised a couple months ago at the probability market participants seemed to ascribe to further easing.”

The presidents’ comments echo the minutes of the Fed’s March 13 meeting, in which a “couple of” participants called for easing only “if the economy lost momentum” or if inflation fell below its 2 percent target. Fed officials will hold the main interest rate close to zero at least through 2014, a date “subject to revision in response to significant changes in the economic outlook,” according to the minutes released on April 3.

Stocks and commodities fell for a second day, with the Standard & Poor’s 500 Index dropping 1 percent yesterday to 1,398.96 after a 0.4 percent decline on April 3.

Eleven regional bank presidents rotate voting on monetary policy with Lacker, Williams, Lockhart and Pianalto voting this year. The New York Fed President and the Washington-based Fed governors always have a vote.

The Fed’s forecasting staff revised up their near-term outlook for U.S. growth “a little,” and reduced their estimate of potential U.S. output as unemployment fell faster than expected in a period of moderate economic growth, according to the minutes.

The best six months of job growth since 2006, unemployment at a three-year low, and stock-market gains are giving Americans the means to withstand a higher gasoline price. A March 30 report from the Commerce Department said Americans increased their spending by the most in seven months, with purchases climbing 0.8 percent in February.

“While further easing is obviously something that’s conceivable, I wouldn’t favor it unless conditions deteriorated quite substantially” for growth and inflation, Lacker told reporters and editors at the Bloomberg News Washington bureau.

Pianalto and Lockhart also expressed reluctance about further easing this week.

“I would have to see some pretty severe circumstances before I endorse for another round of quantitative easing,” Lockhart said in an April 3 interview on Bloomberg Radio’s “Hays Advantage” with Kathleen Hays. “The outlook is positive enough that I am not sure I see the need for it.”


Further Stimulus

Pianalto said in a speech April 2 that further monetary stimulus could put the central bank’s inflation goal “at risk,” and that the Fed’s current stance is “best suited to foster steady gains in output and employment and to maintain stable prices.”

The Federal Reserve Bank of New York’s survey of primary dealers conducted before policy makers met last month showed that the firms saw the probability of another round of bond buying declining from January.

The median respondent saw a 50 percent chance that the Fed would expand its balance sheet through securities purchases within one year, down from 55 percent odds in the survey conducted before the Federal Open Market Committee’s Jan. 24-25 meeting, results released yesterday by the New York Fed showed.

The Fed presidents, while backing away from stimulus, aren’t removing it as an option.

“Relative to a few months ago, I think that the downside risks to the U.S. economy have lessened,” Williams said yesterday in San Francisco. Still, another round of asset purchases is “not off the table.”

Fed Chairman Ben S. Bernanke has maintained a cautious tone on the economy since the March meeting, saying in an interview last week with ABC News television that “it’s far too early to declare victory.”

Asked if another round of quantitative easing, or large- scale bond purchases, remains “on the table,” the Fed chief said, “we don’t take any options off the table” and “we have to be prepared to respond to however the economy evolves.”

Commodities fell and the dollar strengthened beginning on April 3. The S&P GSCI gauge of commodities retreated 2 percent yesterday and 0.4 percent on April 3. The dollar rallied 0.3 percent yesterday and 0.8 percent on April 3.


New Action

Policy makers at last month’s FOMC meeting raised their assessment of the economy as the labor market strengthened, and refrained from taking new action to cut borrowing costs. The Fed next meets April 24-25.

Richmond’s Lacker, also appearing in an interview with Bloomberg Television’s Trish Regan, said a U.S. law restricting proprietary trading at banks and scheduled for enactment in July may be “impossible to implement.”

The so-called Volcker rule, named for its original champion, former Fed Chairman Paul Volcker, is aimed at reducing the odds that banks will make risky investments with their own capital and put depositors’ money at risk. Lacker said bank trading books were “kind of tangential” to the financial crisis of 2008-2009, when bank capital was eroded by losses on risky mortgages, many of them bundled into complex securities.


Bloomberg News

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