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US Federal Reserve officials defend drive to lower rates

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The Federal Reserve officials on Tuesday fought back against a stream of criticism over its $600 billion economic stimulus, arguing it was necessary to shore up the fragile recovery.

The Fed’s effort to pump money into the financial system by buying up Treasury bonds has sparked fears it will feed asset bubbles in emerging markets and generate domestic inflation.

Atlanta Fed President Dennis Lockhart took issue with the idea pressed repeatedly by top economic officials in countries like China and Brazil that the easing was a backdoor effort to jumpstart exports through a weaker dollar.

“There is no monetary policy intent to engineer specific values — or even a direction– for the dollar,” Lockhart said in a speech before the Alabama World Affairs Council. “This policy was not undertaken to prompt dollar depreciation.”

Others struck a similar chord.

In an interview with the Wall Street Journal, Charles Evans of the Chicago Fed said the central bank’s primary concern must, by definition, the performance of the American economy.

After emerging last summer from its deepest recession since the Great Depression, the U.S. economy has grown unevenly. It registered a modest 2 percent annualized rate of growth in the third quarter.

Unemployment remains stuck at 9.6 percent and inflation is running at below the levels preferred by Fed policymakers.

“I would continue to want to apply accommodative monetary policy until I had some confidence that that situation was changing,” Mr. Evans was quoted as saying in the Journal interview. He said $600 billion is a “good place to start” the easing program.

U.S. producer prices excluding food and energy unexpectedly fell in October to post their largest decline in more than four years.

“It suggests that the Federal Reserve’s fight … may be tougher than we might have thought,” said Hugh Johnson, chief investment officer at Hugh Johnson Advisors in Albany, New York.

WHOLE HOG

Boston Fed President Eric Rosengren , who, like Evans, is considered one of the more dovish members of the Federal Open Market Committee that sets official U.S. interest rates, was even willing to consider additional purchases.

“As long as the economic outlook doesn’t improve dramatically I would expect that we will purchase the entire amount,” he told the Wall Street Journal. “If the economy were to weaken and we were to get further disinflation and a higher unemployment rate, then we would have to reflect on whether we should take additional action.”

Lockhart, the Atlanta Fed President, also indicated he expected the full $600 billion program to be completed through its June deadline.

His St. Louis counterpart, James Bullard, suggested it would take a perceptible turnaround in the economy’s prospects for officials to stop short.

“The economy would have to improve a fair amount before the whole committee would pull back on that,” Bullard told Bloomberg Radio.

Reuters reported on Friday that the Fed was unlikely to trim the bond purchase plan, barring a sharp shift in the U.S. economic outlook.

During the financial crisis of 2007-2009, the Fed lowered official rates effectively to zero and bought some $1.7 trillion in Treasury and mortgage-linked securities.

MANDATE QUESTIONED

The array of official commentary comes as domestic opposition to the Fed’s asset-purchase program, mostly from Republican lawmakers and right-leaning economists, reached a crescendo.

On Tuesday, two prominent U.S. Republican lawmakers said the Fed should focus solely on inflation and ditch its “dual mandate” to promote both price stability and full employment.

Asked about the proposal, Lockhart said it was too early to comment. Rosengren was more forceful, maintaining that the two goals were wholly compatible given that both inflation and employment are below desired levels.

A U.S. Senate committee on Tuesday approved the nomination of Nobel laureate Peter Diamond to the Fed’s Board over Republican objections, sending it to the full Senate for a vote three months after it was blocked.

The Fed expects its unconventional monetary accommodation to boost spending by consumers and businesses by driving up prices in asset markets, making it easier for companies to fund new investments and helping households to repair their battered balance sheets.

Lockhart argued the policy was already showing signs of working by boosting market-based expectations of inflation, thereby lessening a risk of deflation that looked all too real just a couple of months back.

William Dudley, head of the New York Fed , emphasized the modest, incremental nature of the policy’s likely effects, saying it could take a long time before economic conditions warrant an unwinding of the ultra-easy policy stance.

“This exit could be years away,” he said an interview on CNBC.

The Fed’s latest round of monetary accommodation, also known as quantitative easing, faces some internal opposition as well. Fed Board Governor Kevin Warsh argued last week he did not believe the policy would yield significant benefits.

Richmond Fed President Jeffrey Lacker said on Sunday he thought the program’s risks outweighed its benefits.

Source: Reuters

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