July 9, 2012 / 6:34 AM / 5 years ago

Top Fed officials argue case for more U.S. easing

BANGKOK (Reuters) - The U.S. Federal Reserve should loosen policy further with a new round of bond purchases as a way to bring down unemployment, even at the risk of driving inflation temporarily higher, one of the Fed’s most dovish policymakers said on Monday.

“Additional monetary accommodation is needed to more quickly boost output to its full potential level,” Chicago Federal Reserve Bank President Charles Evans told a forum in Bangkok. “The economic circumstances warrant extremely strong accommodation.”

The president of the Boston Federal Reserve, Eric Rosengren, backed that view, especially after what he called disappointing employment data for June published on Friday.

Addressing the same Sasin Bangkok Forum, Rosengren said he was personally more pessimistic on the economy than the Fed’s policy-making Federal Open Market Committee, expecting GDP growth this year to be lower than its forecast of 1.9-2.4 percent and unemployment higher than its 8.0-8.2 percent range.

“So far data has been coming in weak and I gave a weak forecast myself,” he told reporters after his speech. “I think it’s appropriate to have more quantitative easing.”

Rosengren, like Evans, is at the dovish end of the spectrum among top Fed officials. Neither is a voting member of the FOMC this year, but both will be in 2013.

At the forum, Rosengren said he thought inflation would only be around 1.2 percent in 2012.

Evans also said wage pressures were virtually non-existent and that inflation was likely to stay at or below the Fed’s 2 percent target.

He acknowledged that advocating a policy that risks pushing up inflation, even temporarily, opened him up to charges of central bank “blasphemy”.

“I can’t tell you how often people look at me in abject horror when I say that we should adopt a conditional policy that tolerates the risk of inflation exceeding our target by as much as 1 percentage point,” he said.

But with U.S. unemployment already several percentage points above the level most see as sustainable, the Fed should be willing to tolerate a “modest, transitory rise” in inflation to bring it down, Evans said.

STRONGER STEP NEEDED

The Fed has kept benchmark short-term interest rates near zero since December 2008 and signaled it would keep them there until 2014 to bolster the economy.

It has undertaken two unprecedented rounds of so-called quantitative easing, buying $2.3 trillion in long-term securities to push down borrowing costs.

Last month, after a stream of disappointing economic news, the Fed slashed its outlook for growth but took only a modest step towards easing policy further, adding six months to its so-called Operation Twist program, which aims to lower rates by selling short-term securities and buying long-term ones.

“I would have preferred an even stronger step, such as the purchase of more mortgage-backed securities,” said Evans, repeating his call, first made last September, for the Fed to keep interest rates low until the U.S. unemployment rate falls below 7 percent or inflation threatens to top 3 percent.

After the government report on Friday showing yet another month of weak job growth, the campaign to convince Fed Chairman Ben Bernanke and fellow policymakers to undertake more aggressive easing appears closer to winning converts.

CHANCE OF EASING IMPROVES?

Economists at Wall Street’s top bond-trading firms now put the likelihood of a third round of quantitative easing at 70 percent, a Reuters poll showed on Friday, up from 50 percent on June 20.

The Fed next meets to discuss policy on July 31 to August 1, and then on September 12 to 13.

Evans said the outlook for tepid economic growth meant the jobless rate - stuck at 8.2 percent in June - was likely to stay well above sustainable levels for years to come.

Unemployment has been above 8 percent for three years, much higher than the 5.25 to 6 percent that Fed officials see as full employment.

Late last week, various central banks including those of China and the euro zone eased monetary policy, reflecting growing alarm over the health of the world economy.

Rosengren noted that economic activity was slowing in many parts of the world, including the United States and China, while “it looks like Europe is in a recession.”

“This likely reflects a widespread concern that global trade may be disrupted if there is an international financial shock, and that businesses are postponing hiring and investment decisions until the global outlook is more certain,” he said.

Additional reporting by Jonathan Spicer; Writing by Ann Saphir and Alan Raybould; Editing by Richard Borsuk

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