Fed officials offer divergent views on inflation risks

Mon Oct 15, 2012 4:55pm EDT
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By Jonathan Spicer and Pedro da Costa

(Reuters) - Federal Reserve officials offered divergent opinions on Monday about the correct stance for monetary policy, pitting a hawk against a dove over the inflation risk posed by the central bank's massive efforts to buoy U.S. growth.

The Fed, which meets to review policy next week, in September announced a third round of quantitative easing and pledged to keep interest rates near zero until mid-2015 in an effort to underwrite a durable economic upswing.

Anti-inflation hawks were outnumbered by the doves on the Fed's policy-setting committee, who view inflation as a distant threat in the face of tepid U.S. growth and high levels of joblessness, plus other gauges of economic slack.

"If we were to see some good news on growth I would not expect us to respond in a hasty manner," said William Dudley, president of the New York Federal Reserve and a close ally of Fed Chairman Ben Bernanke.

U.S. retail sales notched a brisk 1.1 percent gain last month, data released earlier on Monday showed, as Americans bought more goods in an upbeat sign of economic activity.

That news, which promised faster economic growth ahead, followed a sharp drop in unemployment last month to 7.8 percent, which brought the rate below 8 percent for the first time in 3-1/2 years, although it remains high by historic standards.

Dudley also told the National Association for Business Economics at an event in New York that fears the Fed's extraordinary stimulus steps will cause financial asset bubbles or inflation were misplaced.

He said the Fed's ability to adjust the interest it pays banks to park funds there - called interest on excess reserves, or IOER - "means we can keep inflation in check regardless of the size of our balance sheet."   Continued...

William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York, speaks at the Council on Foreign Relations in New York, May 24, 2012. REUTERS/Andrew Burton