Fed officials express doubt on faster inflation as tool to boost growth

Two Federal Reserve policymakers voiced wariness about the idea of spurring growth by letting inflation accelerate as they reiterated support for the central bank’s unprecedented monetary easing.

Fed Governor Sarah Bloom Raskin said the central bank’s use of tools has been “completely appropriate” and that she would be “quite leery” of allowing higher inflation or price expectations in an attempt to lower real interest rates. St Louis Fed President James Bullard said faster inflation won’t reduce the housing glut. He also said “monetary policy is ultra-loose right now, and appropriately so.”

Fed Chairman Ben S Bernanke and colleagues have discussed adopting specific levels of inflation and unemployment as conditions for keeping interest rates near zero. Only Chicago Fed President Charles Evans has public supported the idea of allowing price increases faster than two per cent annually as a way to lower unemployment.

“One of the explicit mandates of Congress is price stability, and keeping inflationary expectations anchored is, in my mind, extremely important,” Raskin, 50, said in response to an audience question yesterday in Washington after a speech to the University of Maryland’s Robert H Smith School of Business.

The Federal Open Market Committee (FOMC) said on September 21 it will buy $400 billion of Treasury securities with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less.

It was the second straight expansion of unconventional monetary tools, following the August decision to say the benchmark interest rate will stay close to zero until at least mid-2013 instead of the previous, less-specific “extended period” language that had been in place since March 2009.

Raskin indicated she might support unspecified further stimulus. While the effects of Fed actions have been “somewhat more muted than I might have expected,” she said, that shouldn’t imply that additional easing “would be unhelpful.”

“Indeed, the opposite conclusion might well be the case — namely, that additional policy accommodation is warranted under present circumstances,” she said in a speech, her first devoted to monetary policy since the former Maryland chief financial regulator joined the Fed almost a year ago.

The FOMC at its August 9 meeting considered conditioning its pledge to keep interest rates at record lows “on explicit numerical values for the unemployment rate or the inflation rate,” according to minutes released August 30.

“Some members argued that doing so would establish greater clarity regarding the committee’s intentions and its likely reaction to future economic developments, while others raised questions about how an appropriate numerical value might be chosen,” the minutes said.

The commitment should be contingent on joblessness falling to around seven per cent or 7.5 per cent as long as inflation stays below three per cent in the medium term, Evans said on September 7 Fed policymakers aim for long-run inflation of about 1.7 per cent to two per cent.