Fed Meeting Shows Dissent on Measures to Lift Job Growth
The New York Times
By: Binyamin Appelbaum
February 21, 2013
WASHINGTON -- There are widening divisions among officials of the Federal Reserve over the value of its efforts to reduce unemployment, but the authors of its bond-buying policy remain firmly in control, according to an official account of the January meeting of the Fed's policy-making committee.
An increasingly outspoken minority of Fed officials are concerned that monthly purchases of about $85 billion in Treasury securities and mortgage-backed securities are doing more harm than good. They argue the effort may need to end even before the nation's unemployment rate drops, because it is encouraging excessive risk-taking and could make it harder to control inflation.
But the Federal Open Market Committee reiterated its determination in January to hold course until there was "substantial improvement" in the outlook for job growth, and several officials cautioned at the meeting that the greater risk to the economy was in stopping too soon, according to the account, which was published after a standard three-week delay.
Those officials "noted examples of past instances in which policy makers had prematurely removed accommodation, with adverse effects on economic growth, employment and price stability," it said. "They also stressed the importance of communicating the committee's commitment to maintaining a highly accommodative stance of policy as long as warranted by economic conditions."
Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, said investors should not be misled by the amount of space in the Fed's account concerned about its current policies, because the Fed's chairman, Ben S. Bernanke, and his supporters, continue to regard the asset purchases as a necessary and effective strategy to foster job growth.
"We view Mr. Bernanke as being firmly in charge of the committee, and very dovish indeed," Mr. Shepherdson wrote in a note to clients. He said he expected the Fed's asset purchases to continue at the current pace for the rest of the year.
While officials pushing for an earlier end to asset purchases do not have nearly enough votes on the 12-member committee to force a change in policy, they could reduce the impact of the Fed's efforts by convincing investors that purchases are even slightly more likely to end sooner.
Historically, it is often true that outspoken opposition has produced a moderation in Fed policy, because the committee prefers to operate by consensus. But Mr. Bernanke in recent years has demonstrated that he can and will maintain majority support in the face of persistent dissent.
His hand is strengthened by the fact that some Fed officials want to do still more to stimulate the economy. Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, has said that the Fed should hold short-term interest rates near zero at least until the unemployment rate falls below 5.5 percent. The Fed has said that it intends to hold rates near zero at least until unemployment falls below 6.5 percent. The rate in January was 7.9 percent.
The Fed could also be fortified in its current policies if Congress continues to cut spending. Another round of across-the-board cuts is scheduled to take effect March 1. The Congressional Budget Office estimates the cuts would reduce growth by 0.6 percentage points this year, and employment by about 750,000 jobs.
There is little internal support for increasing the pace of securities purchases, but the account says that some officials raised the possibility of maintaining a portion of the Fed's investment portfolio for a longer period as the economy recovers.
The theory, which also underpins the Fed's plan to suppress interest rates for several more years, is that the Fed cannot do much more now, but it can compensate by maintaining its efforts for longer than it otherwise would. Holding onto the assets longer would maintain downward pressure on interest rates.
The account said the committee planned a review of the asset purchase policy at its next scheduled meeting on March 19 and 20.
The meeting account shows Fed officials generally expected a slow improvement in economic conditions this year, and were not overly concerned that the economy had not expanded, or expanded only modestly, in the final months of 2012. But they do not expect the economy to expand fast enough to significantly reduce unemployment.
The account also indicated that "a number" of officials are concerned that the economy is suffering permanent damage, partly because people unemployed for long periods are losing their skills, which could impede growth for years to come.
The Fed's vice chairwoman, Janet L. Yellen, said in a speech this month that inflation remained low and steady, while unemployment remained stubbornly high. As a result, she said, "it is entirely appropriate for progress in attaining maximum employment to take center stage in determining the committee's policy stance."
But some Fed officials have expressed growing unease that, even if inflation remained under control, asset purchases might disrupt financial markets. One concern is that low interest rates will encourage excessive risk-taking, inflating new asset bubbles that will inevitably pop. The Fed's purchases also may disrupt the normal operations of financial markets by constraining the supply of safe assets.
A Fed governor, Jeremy C. Stein, said this month that he saw "a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit," referring to a rise in the sale of new junk bonds, or high-risk corporate debt.
Mr. Stein said he did not see any reason for an immediate change in Fed policy, but Esther L. George, president of the Federal Reserve Bank of Kansas City, cited similar concerns in opposing the current policy at the January meeting.
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