Fed still divided as Fisher sees no need for QE3

Reuters

AUSTIN, Texas (Reuters) – A third round of large-scale asset purchases by the Federal Reserve is not needed and would compound the difficulties of tightening monetary policy when the time finally comes, a top Fed official said on Thursday. « Personally I don’t see how you can justify it given the state of the current economy, » Dallas Federal Reserve President Richard Fisher said in remarks that underscored the sharp divide within the U.S. central bank over what to do in the face of an uneasy economic recovery.

Earlier Thursday, the head of the Chicago Fed, Charles Evans, advocated a much more forceful approach in tackling unemployment, even if it means jumping into a potentially controversial new round of so-called quantitative easing, or QE3.

« I would be very aggressive, » Evans told a small group of reporters.

Fisher and Evans stand on opposite ends of a wide philosophical spectrum of the 17 Fed policymakers, a divide that was clear last week when the central bank anonymously published their individual forecasts: some expect rates to rise this year while others don’t see that until 2016.

Chairman Ben Bernanke and others have suggested that more asset purchases may be necessary if unemployment, now at 8.5 percent, remains high and if inflation is subdued, and if the U.S. economic recovery fails to gain traction.

Inflation has slowed over the last couple of months and the Fed expects it to ease this year. Core inflation is now running at about 1.7 percent.

Fisher, an outspoken policy hawk, acknowledged that the Fed may have more latitude to pursue easy-money policies if inflation runs below its newly set 2 percent target – though he added that such a move does not guarantee more jobs, and that he personally would not advocate it.

« Again it’s a question of efficacy, » he told reporters after a speech to the Headliners Club of Austin. « Is it needed? I don’t think so. And secondly it compounds the difficulty of an exit when the right time comes. »

UNPRECEDENTED POLICY STEPS

In a big step toward transparency, the central bank last week adopted the explicit inflation target. But it declined to likewise set a target for its other main concern, unemployment, arguing that monetary policy has little direct influence on jobs.

Already the Fed has bought some $2.3 trillion in long-term securities and has kept interest rates near zero for more than three years in an unprecedented attempt to revive the economy after a harsh recession that doubled the jobless rate.

Bernanke, testifying before Congress Thursday, found himself on the defensive against charges from Republican lawmakers that the Fed’s easy-money policies and focus on employment risked sparking inflation. The chairman argued the economy still needs plenty of support, aligning himself more with the doves like Evans than with the hawks.

On Friday, U.S. data on new January jobs are released, which could show how sustainable were the labor market improvements at the end of 2011.

EYES ON THE CALENDAR

In what was interpreted as more easy policy, the Fed’s policy-setting committee last week also said it expected to keep interest rates « exceptionally low » at least through late 2014, more than a year later than its previous target date.

Fisher – echoing comments by Charles Plosser of the Philadelphia Fed on Wednesday – criticized the move on grounds that monetary policy should not be tied to a specific date.

« Instead, I feel that the key should be to calibrate monetary policy according to the state or condition of the economy, » Fisher said.

The Fed should use monetary policy to sustain the signs of improvement, « and not to crimp what are emerging buds, » he said of the recent signs of economic improvement.

Fisher dissented in decisions of the Fed’s policy-setting committee last year because he saw the actions as over-accommodative and risking inflation in the future.

Both he and Evans do not have votes this year but they regain them in 2014, when most policymakers expect the first rate rise, according to the forecasts by individual Fed officials.

The Fed’s new inflation target and the acknowledgement on unemployment effectively puts the ball into Congress’ court to take steps to lower unemployment and help the economy, Fisher added.

« The Fed, the nation’s monetary authority, has clearly articulated its longer-run goal and policy strategy and has conducted itself with integrity by responding to the needs of the economy, » he said.

« In contrast, the fiscal authorities have conducted themselves with impunity: Their only long-term strategy is to pass the bill to our children and grandchildren. »

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