Fed officials laud stimulus, quibble over future plans

New York, Dec 12 : Central bankers appear satisfied with the impact of their latest monetary stimulus, though there is some disagreement over how forcefully to continue purchasing bonds, remarks by two top policymakers showed.

Boston Federal Reserve Bank President Eric Rosengren, one of the most vocal proponents of Fed asset purchases, said there was a "strong case" for the Fed to stay the course on accommodative policies next year and continue buying a total of $85 billion in bonds each month.

In September, the Fed announced an open-ended bond buying scheme that began with $40 billion per month in mortgage-backed securities.

That new effort to boost the economy comes on top of a separate program in which the Fed was buying $45 billion of longer-term Treasury securities per month with proceeds from sales of a like amount of shorter-term debt.

The latter plan, known as Operation Twist, is set to expire at the end of this month, and most analysts expect the central bank to substitute an equal amount of long-term Treasury buying.

However, James Bullard, president of the St. Louis Fed, argued the central bank should not replace its expiring 'Operation Twist' program on a dollar-for-dollar basis. He said purchases that expand the Fed's $2.8 trillion balance sheet would have a bigger effect than Twist, which does not add to the balance sheet.

"If the goal is to keep policy on its present course, the replacement rate should be less than one-for-one," Bullard told the Little Rock Chamber of Commerce, suggesting $25 billion as an adequate monthly amount.

Whether to expand the Fed's balance sheet further will be a key topic of debate at Fed policymakers' next meeting on December 11-12. Also under consideration: tweaking Fed communications by adopting numerical thresholds for inflation and joblessness to signal when rates might rise.

Bullard said he supported the adoption of such thresholds as long as the Fed can address his concerns, especially his worry that the Fed is seen as trying to target unemployment. That approach was badly discredited in the 1970s, he said, when rates were kept low to boost jobs and inflation skyrocketed.

Bullard had previously sounded more skeptical on thresholds, saying they could rob the central bank of flexibility.

But the idea has recently gained traction, with Fed Vice Chair Janet Yellen voicing strong support for the idea, first advocated by Chicago Fed President Charles Evans a year ago.

Evans wants the Fed to keep rates low until unemployment drops to at least 6.5 percent, as long as inflation does not threaten to rise above 2.5 percent. Minneapolis Fed President Narayana Kocherlakota and Boston Fed's Rosengren have also pitched specific proposals.

The U.S. economy grew at a 2.7 percent annual rate in the third quarter but is expected to have slowed in the final months of the year. Unemployment remains elevated at 7.9 percent.

Bullard said he expects the expansion to pick up steam in 2013, allowing gross domestic product to rise about 3.5 percent. But he added that estimate was predicated on a successful resolution of a year-end budget crunch, still a big "if".

William Dudley, head of the New York Fed, argued the Fed's mortgage-backed securities purchases have provided much-needed support to the economy, even if their benefits in easing financial conditions have not been fully passed through from financial institutions down to customers.

"Our policy has been and continues to be effective - though it is certainly not all-powerful in current circumstances," he said at a conference on mortgage finance at the New York Fed, at which his Boston Fed counterpart Rosengren was the keynote speaker.

The conference was aimed at exploring some of the blockages in the transmission of Fed policy to American consumers, Dudley said.

"We are focusing on ... the significant widening of the spread between yields on mortgage-backed securities and primary mortgage rates," he said.

In response to the financial crisis and deep recession of 2007-2009, the Fed had already slashed official rates to zero and bought some $2.3 trillion in government and mortgage-backed bonds prior to the launch of its latest stimulus.

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