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Speeches show Fed division on course of action

Divisions within the Federal Reserve over how to pump up the economy and lower unemployment came into sharper view Wednesday.
/ Source: The Associated Press

Divisions within the Federal Reserve over how to pump up the U.S. 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 policymakers must do what they can to bring some 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," he concluded.

Plosser said: "Monetary policy is not a magic elixir that can solve every economic ill."

However, Rosengren said buying more government debt could benefit the economy, and therefore should be considered.

"It is important that policymakers 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.

Although the Fed has yet to coalesce around a specific plan, one idea put forward by James Bullard, president of the Federal Reserve Bank of St. Louis, is gaining closer scrutiny.

Under Bullard's approach, the Fed would initially buy a moderate amount of government bonds — perhaps in the range of $100 billion or less. After that, the Fed would review the economic climate at each meeting and decide whether it needs to buy more government bonds to bolster the recovery.

That would allow the Fed to avoid making the kind of upfront commitment to buy government debt on a large scale in the trillion-dollar range. It also could ease concerns among some Fed officials about carrying out the type of large-scale interventions seen during the recession.

The Fed ended up buying a total of roughly $1.7 trillion of mortgage securities and debt, as well as government bonds, during the recession.

Another big buying binge would complicate the Fed's efforts later on to unwind all its stimulus. There are also concerns that another large-scale effort could spark inflation later on or trigger a wave of speculative buying that could create bubbles in the prices of bonds or commodities or other assets.

On Wednesday, the three Fed presidents in their speeches weighed the pros and cons of buying government debt in general, rather than the specific Bullard proposal.

Rosengren is currently a voting member of the Federal Open Market Committee — the group, including Fed Chairman Ben Bernanke, that makes decisions on interest rates and other policies that influence economic activity. Kocherlakota and Plosser will both be voting members next year, although they participate in the Fed meetings and debates over policy moves. Kocherlakota spoke in London, while Plosser spoke in New Jersey.