Fed debate about more easing heats up
NEW YORK (Reuters) - The Federal Reserve should consider buying more mortgage bonds to support a fragile economic recovery, a top Fed official said on Thursday, while two other officials argued the central bank's current policy is appropriate.
In his first speech explicitly on the economic outlook since joining the Fed in 2009, Fed Governor Daniel Tarullo said there was "ample room" for policymakers to do more. Tarullo said mortgage purchases should be on the table, a sentiment echoed by Boston Fed President Eric Rosengren in an interview with the Wall Street Journal on Wednesday.
For his part, St. Louis Fed President James Bullard on Wednesday told reporters that with recent economic data looking better, "monetary policy is appropriately calibrated for this situation." Cleveland Fed President Sandra Pianalto also said Fed policy actions were "appropriate."
The remarks suggest a growing debate among Fed officials about how aggressively to support an economy that is not growing quickly enough to make a significant dent in an unemployment rate that has been hovering around 9 percent.
Pianalto described the economic recovery as "painfully" slow and unlikely to gather pace soon, while Tarullo likened it to a "slogging through the mud and occasionally hitting stretches of dry pavement."
"There is need, and ample room, for additional measures to increase aggregate demand in the near to medium term, particularly in light of the limited upside risks to inflation over the medium term," said Tarullo, who as a Fed Governor has a permanent vote on monetary policy.
ONGOING HOUSING PROBLEMS
Because the ongoing housing problems are so central to the recession and the anemic nature of the subsequent expansion, the Fed should refocus its efforts on housing, Tarullo said.
"I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities," he added. The Fed bought $1.25 trillion worth of mortgage-related debt, starting in 2009.
Bullard, who like Pianalto, does not have a vote on monetary policy this year, said the Fed should wait and see how policies it has put in place, including a recent decision to replace shorter-term securities it holds with longer-term ones, affect the economy before taking any further actions.
"Given that the tone of the data has been better in the last six weeks ... then I think you probably want to get into next year before you start thinking about what you do on top of Operation Twist," he said.
The Fed at its September meeting said it will replace $400 billion of short-term securities on its portfolio with longer term ones to push longer-term interest rates lower -- which is known as Operation Twist. It will also replenish its holdings of mortgage-related debt to support the depressed housing market. Tarullo said Operation Twist, while helpful, was "by definition limited".
Operation Twist was the latest in a long series of extraordinary steps to boost growth through a financial panic and deep contraction. The Fed cut rates to near zero almost three years ago and announced in August rates would likely stay that low through the middle of 2013. The central bank has also bought $2.3 trillion in securities to encourage borrowing.
Bullard is viewed as a centrist on the spectrum of views between inflation-focused "hawks" and full-employment emphasizing "doves." Pianalto and Tarullo are seen as leaning toward the dovish camp.
(additional reporting by Mark Felsenthal in St. Louis, Pedro da Costa in Washington and Larry Vellequette in Toledo, Ohio; editing by Bob Burgdorfer)