Everyone on the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) is willing to ease monetary policy further, but Fed officials’ conditions for further credit easing vary widely.
There are those who are ready to inject more monetary stimulus right now. Others would be prepared to provide yet more monetary accommodation if the economy doesn’t improve soon. And some would ease more only if the economy, and economic outlook, deteriorate further from the downwardly revised forecasts the FOMC made in November, and only if disinflation becomes excessive.
The Fed leadership troika, Chairman Ben Bernanke, Vice Chair Janet Yellen and New York Fed President William Dudley, form a fourth category, having understandably struck a more ambivalent, wait-and-see pose. But they have shown an easing bias.
The recovery remains subpar, and the FOMC calls the downside risks "significant." With the intensification of the European crisis, there is much angst about transatlantic spillovers. So the odds of further easing in 2012 look high, but there is no consensus on timing or type.
Leading the way for immediate easing is Chicago Fed President Charles Evans. An advocate of a third round of large-scale asset purchases (QE3), including mortgage-backed securities, he says the Fed faces a grave "liquidity trap" and "ought to be behaving as if there is a very big problem" with unemployment.
Evans argues the Fed should tolerate inflation up to 3% to cut unemployment and may need to keep the federal funds rate at zero well beyond the mid-2013 date that the FOMC has targeted. He’s pushing for a pledge to keep it there until the unemployment rate falls below 7% and/or the inflation rate goes above 3%.
Most officials would prefer a more "state-contingent," less date-certain statement. San Francisco Fed President John Williams, a 2012 FOMC voter, also is inclined to ease soon. Even before the European debt crisis reached fever pitch, he was saying "additional monetary policy accommodation — either in the form of additional asset purchases or further forward guidance on our future policy intentions — may be needed to bring us closer to our mandated objectives of maximum employment and price stability."
Boston Fed President Eric Rosengren disputes the "common misconception" that because rates are already low further monetary policy actions will have no impact. He estimates "a sustained decline" in the 10-year Treasury note yield of 100 basis points would boost real GDP 2% over two years.
Some would ease if the economy fails to improve. "In the absence of favorable developments in the coming months, there will be a strong case for additional measures," says Fed Governor Daniel Tarullo.
Cleveland Fed President Sandra Pianalto, a 2012 FOMC voter, calls the Fed’s highly accommodative policy appropriate, but hasn’t indicated under what conditions she would support additional easing. Echoing others, she says "monetary policy alone cannot cure all of the economy’s ills."
Atlanta Fed President Dennis Lockhart, who also will join the voting ranks, says he’s skeptical that further asset purchases will produce increased economic activity.
Others set a high bar for easing. St. Louis Fed President James Bullard says the economy "has to be worse than the downgraded projections. Inflation would have to moderate more than it has so far, and in addition you would have to have a forecast that it was going to go down to exceptionally low levels."
Minneapolis Fed President Narayana Kocherlakota believes the FOMC will need to reduce accommodation in 2012, if not by raising rates then by shortening the timeframe for holding the funds rate near zero. But he allows for additional easing if unemployment unexpectedly rises or inflation falls.
Even hawkish Philadelphia Fed President Charles Plosser says he could back more accommodation "if we were to face a deflation and were worried that expectations of inflation were falling significantly," or if there were to be another financial crisis. Richmond Fed President Jeffrey Lacker, another 2012 voter, takes a similar view.
Bernanke says "We’ve already taken quite a bit of action but we are prepared to do more and we have the tools to do more if that’s appropriate."
He stresses that unemployment remains "painfully high" and says the Fed is "focusing intently on supporting job creation."
Yellen, warning the economy is at a very dangerous moment, sees "additional accommodation through enhanced guidance on the path of the federal funds rate or through additional purchases of longer-term financial assets."
Dudley is "very unhappy" with the economic outlook and says the Fed could do more to boost the economy, including mortgage backed securities purchases. The noncommittal FOMC vice chairman says "monetary policy will continue to have an important role" in "sustaining aggregate demand," but says the FOMC will have to "evaluate whether there are other steps we can take."
More quantitative easing may be coming, perhaps even before "Operation Twist" ends, but the timing is uncertain.
Steve Beckner is senior correspondent for Market News International. He is heard regularly on National Public Radio and is the author of "Back From The Brink: The Greenspan Years" (Wiley).
