Fed officials at odds over policy path

Wed Jan 11, 2012 5:18pm EST
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By Andrew Stern

LAKE FOREST, Illinois (Reuters) - Top Federal Reserve officials disagreed on Wednesday over how aggressive the central bank should be to spur faster growth and bring a lofty jobless rate down more quickly.

Chicago Fed President Charles Evans said he favors the Fed strengthening its commitment to holding interest rates near zero by adopting specific thresholds that unemployment and inflation must hit before interest rates could go up.

"The data are not strong enough, or uniform enough, to assert that momentum for growth is building," he said, suggesting that he would favor keeping benchmark rates on hold at least through the mid-2013 date already set.

But Philadelphia Fed President Charles Plosser said rates may need to rise sooner than that. He expressed concern that although inflation has moderated it remains above levels forecast for 2011 and that policymakers need to be ready to remove easy money policies.

"Inflation most often develops gradually, and if monetary policy waits too long to respond, it can be very costly to correct," he said. "We need to proceed with caution as to the degree of monetary accommodation we supply to the economy."

The two officials represent opposing extremes of the debate at the Fed over how much medicine the economy needs to solidify its recovery from a deep recession that ended two-and-a-half years ago.

Signs that recovery in the economy gathered steam in the final months of 2011 has investors questioning whether the Fed will take additional steps to support growth, such as buying more bonds in a strategy known as quantitative easing. In its Beige Book anecdotal review of economic conditions, the Fed said growth is expanding moderately but a weak jobs market is holding back income growth, needed to support expansion.

The central bank next meets to discuss monetary policy on January 24-25, where it is expected to begin making public more details about its economic forecasts and goals as a way to cement expectations that policymakers will keep rates low until the recovery is more robust.   Continued...