Sunday, October 3, 2010

Fed officials clash over new strategies to bolster economy

WASHINGTON - Divisions within the Federal Reserve over how to pump up the economy and lower unemployment came into sharper view Wednesday.

Three Fed officials squared off in competing speeches over how much help would come from one likely next step - buying more government debt.

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, argued that such an effort may not help the economy much. Charles Plosser, president of the Federal Reserve Bank of Philadelphia, made a similar point.

But, Eric Rosengren, president of the Federal Reserve Bank of Boston, said Fed policy makers must do what they can to bring more relief.

The Fed delivered a strong signal last week at its meeting that it was prepared to act if the economy weakened. High on the list of unconventional tools is buying more government debt, known as quantitative easing.

The goal is to force down rates on consumer and businesses loans even more to get Americans to boost their spending. Doing so would help the economy.

In their speeches, Kocherlakota and Plosser expressed skepticism that quantitative easing would drive down rates nearly as much as such efforts did during the recession and financial crisis.

Because financial markets are in better shape now than during the crisis, the difference between the rates on super-safe Treasury securities and rates on other consumer and business loans has narrowed.

"I suspect that it will be somewhat more challenging for the Fed to impact them," Kocherlakota said. A new debt-buying program "would have a more muted effect."

But Rosengren said buying more government debt could benefit the economy.

"It is important that policy makers be open to implementing policies" that are aimed at lowering unemployment and preventing inflation from getting too low, which could put the country at risk of deflation, he said in a speech in New York.

Many economists believe the Fed is likely to announce action when it wraps up a two-day meeting on Nov. 3, the day after the congressional midterm elections.

by Jeannine Aversa Associated Press Sept. 30, 2010 12:00 AM

Fed officials clash over new strategies to bolster economy

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