Two Fed officials see growth but divided on stimulus

Reuters News
Posted: Jul 28, 2011 4:44 PM
Two Fed officials see growth but divided on stimulus

SALT LAKE CITY (Reuters) - Two top Federal Reserve officials diverged on the possible need for further stimulus on Thursday, even as they both forecast a pick-up in growth this year.

The divergent views, from San Francisco Fed President John Williams and Jeffrey Lacker, the Richmond Fed president who is known for his hawkish views on the need to ward off inflation, underscore the deep divides among policy makers at the central bank as they prepare for their next meeting August 9.

The Fed has kept short-term interest rates near zero for two and a half years and has bought $2.3 trillion in long-term securities to boost the economy further, including a round of bond-buying that ended at the close of June.

But as the economy struggles to put the tepid growth of the first half behind it, the sputtering recovery is raising questions among policymakers over further Fed action.

Inflation hawks like Lacker worry that more stimulus could do more harm than good.

"The additional monetary stimulus initiated last November raised inflation and did little to improve real growth," Lacker told a gathering of business executives sponsored by the Dulles Regional Chamber of Commerce.

"Given current inflation trends, additional monetary stimulus at this juncture seems likely to raise inflation to undesirably high levels and do little to spur real growth," he said.

He also pushed back against speculation in financial markets that the Fed might need to embark on a fresh round of bond purchases to stimulate a still-ailing recovery and battered job market.

But Williams, the new head of the Fed's westernmost outpost and the author of a study suggesting the Fed's recent stimulus both boosted jobs and rescued the economy from a possible descent into deflation, suggested the door to stimulus should be kept open.

"If the recovery stalls and inflation remains low or deflationary pressures reemerge, then we may need to keep our very stimulatory policies in place for quite some time or even increase stimulus," Williams told a community leaders forum in Salt Lake City.

The recovery is "stuck in second gear," job creation is slowing to a crawl, and inflation is headed next year back to 1.5 percent, well below the Fed's 2 percent target, Williams said.

Williams did not call outright for more stimulus, and indeed said a "high hurdle" would need to be crossed before conditions would warrant it. He also said that should growth and inflation pick up, the Fed would eventually need to remove stimulus.

But he said his expectation was that inflation would subside.

Fed Chairman Ben Bernanke earlier this month said the U.S. central bank was prepared to act if growth deteriorated much further. While Williams remarks put him squarely in Bernanke's camp, Lacker's put him among the minority that oppose doing any more.

Williams, who will become a voter on the Fed's policy-setting panel for the first time next year, said that while he expects growth to pick up, to about 3 percent in the second half of 2011 and next year, he also sees inflation falling to 1.5 percent, well below the Fed's 2 percent target.

Lacker expects growth not to be less than 2.75 percent, and said he thinks the drags on the economy are mostly short-term. He projected inflation at 2 percent.

(Reporting by Ann Saphir in Salt Lake City and Pedro Nicolaci da Costa in Chantilly, Virginia; Editing by Leslie Adler)