MONTGOMERY Nov 13: The Federal Reserve should keep monetary policy ultra-easy given the economy’s tepid growth and an uncertain outlook for jobs growth, two senior officials said , reinforcing views that the US central bank will not taper bond buying before next year.
At the same time, last month’s government shutdown may undermine the reliability of economic data through December, said Dennis Lockhart, president of the Federal Reserve Bank of Atlanta. That could provide another reason not to expect policy action when the Fed holds its next policy meeting, on Dec. 17-18, though Lockhart would not rule it out.
‘Monetary policy overall should remain very accommodative for quite some time,’ he told an economic forum in Montgomery, Alabama. ‘Even though the economy is growing, and we’re making progress on unemployment, there are real concerns about whether the recent modest pace of GDP is enough to maintain employment momentum.’
The economy picked up speed in the third quarter, but largely because businesses restocked their shelves. With growth in consumer spending the slowest in two years, the gain in business inventories may prove to have not been necessary, and the outlook for activity in the final three months of the year is dim.
Consumer and business confidence was also dented by a bitter budget battle in Washington that partially closed the government for 16 days last month.
Narayana Kocherlakota, president of the Minneapolis Fed, spoke even more strongly about the need for aggressive action to foster growth.
‘Reducing the flow of (bond) purchases in the near term would be a drag on the already slow rate of progress of the economy toward the committee’s goals,’ Kocherlakota told the Chamber of Commerce in St. Paul, Minnesota.
‘Inflation remains weak, or very low by historical standards, by the (Fed’s) goal of 2 percent per year, so there is no reason to be afraid of monetary stimulus,’ he said.

Kocherlakota argued that the central bank should be ramping up, not dialing back, its efforts to stimulate the economy, perhaps by lowering the interest rate the Fed pays to banks for the excess reserves they park at the central  bank.
The Fed should do ‘whatever it takes’ to bring the economy back to full employment quickly, he said, repeating a theme he has hammered home in at least three speeches since September.
Lockhart is a policy centrist who is usually viewed as a good indicator of the consensus among senior officials. Kocherlakota is a noted policy dove.
Neither official is a voting member of the Fed’s policy-setting committee this year, but they participate in the panel’s discussions. Kocherlakota will regain a voting seat on the policy committee next year.
A hearing on Thursday of the US Senate Banking Committee hearing on Thursday on the nomination of Fed Vice Chair Janet Yellen to replace Ben Bernanke at the helm of the central bank will be followed closely in financial markets for clues about future Fed action.
To spur faster growth and hiring, the Fed is buying bonds at a pace of $85 billion per month while promising to hold interest rates near zero at least until unemployment hits a threshold of 6.5 percent, providing the outlook for inflation stays under 2.5 percent. The jobless rate was 7.3 percent in October.
Few economists expect the Fed to scale back its stimulus at its December meeting, although a report on Friday showing solid job growth was seen as raising that risk.
When the central bank does begin to taper its asset purchases, some economists think the Fed may try to offset any negative reaction in financial markets by also lowering the unemployment threshold to 6 percent.
Lockhart suggested he would be supportive of such a move. ‘The mix of tools we use to provide ongoing monetary stimulus may change, but any changes will not represent a fundamental shift of policy,’ he said, in comments that dovetailed with remarks he delivered last week.
Like Kocherlakota, Lockhart noted inflation remained well below the Fed’s 2 percent target, pointing out that the Fed’s preferred gauge of price pressures, the PCE price index, averaged just an annualized 1.2 percent over the last 3 months.
‘Inflation is too low. A persistent low rate of inflation raises concerns about a stalling out of economic expansion,’ he said, although he added it was premature to be alarmed about the danger of a damaging bout of deflation. (AGENCIES)


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