Federal Reserve’s Plosser warns on discretionary policy decisions

PHILADELPHIA, Fri May 25, 2012 – The debate over how the Federal Reserve can best articulate its policy actions grew on Friday as a top Fed official warned against discretionary decisions, and asked whether a more systematic approach was desirable.

Philadelphia Fed President Charles Plosser said the financial crisis has tied the hands of many central banks, including the Fed, creating a “conundrum” of near-zero interest rates and a search for new and untested ways to boost economies.

“The degree to which policy actions, for better or worse, have become increasingly discretionary should give us pause as we try to evaluate policy choices…” Plosser said in prepared remarks to the Deutsche Bundesbank Spring Conference.

“Whether to act as the lender of last resort is discretionary, but does it have to be so? Are there ways to make it more systematic ex ante?” he asked attendees.

Plosser, a policy hawk who sits on a Fed subcommittee looking at ways to improve communications, did not comment on specific policy actions.

Besides taking unprecedented steps to help bail out hobbled U.S. banks and to battle the recession in recent years, the Fed has also taken steps to boost transparency, including adopting a 2-percent inflation target in January.

In recent days, several Fed officials have debated what more, if anything, can be done sharpen the central bank’s communication on the possible future course of monetary policy. More clarity could help individuals, businesses and investors anticipate changes in rates, for example, helping policymakers get results in the economy.

New York Fed President William Dudley, on Thursday, was the latest to weigh in on whether a more systematic or “rules-based” approach to policy-setting was appropriate, dissecting the so-called Taylor Rule and concluding that consideration of alternative policy plans and sober judgment cannot be replaced.

“While simple policy rules provide useful information to policymakers, their very virtue – simplicity – means they cannot capture all information that is relevant for policymaking,” Dudley said in New York.

Industrial output in April rises most in over a year

WASHINGTON, Wed May 16, 2012 – Industrial production posted its fastest growth in over a year in April, boosted by surging output at utilities and a rebound in manufacturing, the Federal Reserve said on Wednesday.

Industrial output grew 1.1 percent last month, the most since December 2010 and nearly twice the pace expected by analysts polled by Reuters.

The Fed also revised its estimates for prior months, saying production contracted 0.6 percent in March and expanded 0.4 percent in February. The Fed previously said production was flat in February and March.

In April, manufacturing output rose 0.6 percent, bouncing back from a 0.5 percent decline in March. A big increase in vehicle production factored in the gains, with output for motor vehicles and parts up 3.9 percent.

Still, the advance in factory output was broad based. Outside vehicles and parts, manufacturing increased 0.3 percent.

Utilities output increased 4.5 percent. Unseasonably warm weather in the first quarter previously had held down demand for heating, the Fed said.

Capacity utilization, a measure of how fully firms are using their resources, rose to 79.2 percent, the highest since April 2008.

Officials at the Fed tend to look at utilization measures as a signal of how much “slack” remains in the economy – how far growth has room to run before it becomes inflationary.

Fed’s Williams sees big costs to boosting inflation

DANA POINT, Calif., Fri May 4, 2012 – Boosting inflation purposefully to prod people into spending more would hurt the economy much more than it would help, San Francisco Federal Reserve Bank President John Williams said on Friday.

The positive effects of such an effort “would be modest,” Williams said after a speech to the California Bankers Association. “The potential costs would be quite significant.”

Nobel-Prize winning economist Paul Krugman has advocated pushing inflation up in order to boost the recovery.

The Fed targets a 2 percent annual rate of inflation.

Rate hikes a distant prospect for more upbeat Federal Reserve

WASHINGTON,| Wed Apr 25, 2012 – The Federal Reserve may appear slightly more upbeat on the economy on Wednesday, though investors should not mistake this cautious optimism for any desire to raise interest rates soon.

Instead, central bank officials will probably reiterate their expectations that official borrowing costs will remain near zero until at least late 2014, and leave open the option to ease policy further if the economy worsens.

“The meeting tomorrow is unlikely to provide any new clues to the Fed’s next actions, rather leaving open the possibility of new measures depending on the economic outlook,” said Richard Gilhooly, a bond market strategist at TD Securities.

Investors wishing for clues to the prospect of a further easing of monetary policy from the central bank may be disappointed, leaving the stock market vulnerable to some selling. Analysts will be keen for any hints of action following the end of the Fed’s Operation Twist, its latest effort aimed at keeping down long-term rates.

Fed not yet decided on more easing, Dudley says

MELVILLE, N.Y., Mon Mar 19, 2012 – The Federal Reserve has not yet decided whether to embark on a third round of quantitative easing, or QE3, though it remains an option, an influential Fed official said on Monday.

New York Fed President William Dudley, a close ally of Chairman Ben Bernanke, painted a mixed picture of the economy, tempering recent signs the recovery is gaining speed with warnings that it could just as easily stall out.

“Nothing has been decided,” he said of QE3, in which the Fed would make large-scale asset purchases in an attempt to lower rates and give the economy another controversial shot of adrenaline.

“It all depends on how the economy evolves,” Dudley added. “It’s about costs and benefits, and if we get to a point where we think the benefits of another program of QE outweighs the costs, then we’ll certainly do so.”

Dudley, like Bernanke in recent testimony to Congress, defended the central bank’s ultra-easy policy stance but seemed to temper any talk of exactly what more it was prepared to do to help along the recovery and ratchet down the unemployment rate, which remains high 8.3 percent.

After a meeting in Washington last week, the Fed’s policy-setting committee made no policy change and gave few clues how it interpreted some recent jobs growth, coupled as it has been with worries over GDP growth and oil price-driven inflation.

Dudley said U.S. economic activity is not yet strong or sustained enough to put a dent in the economy’s “slack,” which is keeping many Americans out of work some three years after the deep recession ended.

“The incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be finally establishing a somewhat firmer footing,” Dudley said, citing expanding GDP late last year, payrolls, sales of motor vehicles, and somewhat firmer housing starts.

“While these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods,” Dudley, a policy dove with a permanent vote on the Fed’s policy-setting committee, told a gathering of the Long Island Association.

Fed may need to buy more mortgage bonds: Williams

SAN RAMON, Calif. – The U.S. central bank may need to buy more bonds to bolster a housing market whose distress is at the heart of a “frustratingly slow” economic recovery, a top Federal Reserve official said on Wednesday.

“Looking ahead, we may still need to provide more policy accommodation if the economy loses momentum or inflation remains well below 2 percent,” San Francisco Fed President John Williams said at the Bishop Ranch Forum, a business group in this San Francisco suburb. “Should that occur, restarting our program of purchasing mortgage-backed securities would likely be the best way to provide a boost to the economy.”

Williams, a voting member this year on the Fed’s policy-setting panel, is on the dovish end of a policy spectrum, more concerned with the harm wrought by continued high unemployment than with the threat of inflation.

The Fed is increasingly pinpointing housing as the key to the nation’s recovery, and Williams is the second regional Fed president inside of a week to make the case for more monetary policy accommodation through the purchase of more mortgage-backed securities.

Chicago Fed President Charles Evans last Thursday said he would be “aggressive” in seeking more help for the economy through the purchase of such bonds.

Further bond purchases by the Fed would amount to a third round of quantitative easing, a controversial move that drew criticism both at home and abroad the last time the Fed took that path.

Fed should raise rates in 2013, Bullard says

CHICAGO – The Federal Reserve should start raising interest rates next year, a top Fed official said on Monday, arguing that many years of near-zero rates will do little to return economic output to pre-recession levels and risks causing “disaster.”

St. Louis Fed President James Bullard said he disagreed with the Fed’s decision last month to keep interest rates exceptionally low through late 2014 to bolster a recovery that was moving too slowly.

Bullard, who does not have a vote on the Fed’s policy-setting Federal Open Market Committee this year, is seen as a policy centrist.

“It’s important to start to remove accommodation — even when you go up to 1 percent or 1½ percent, that’s still very easy monetary policy,” Bullard told reporters. “It’s a matter of getting to a normal level of interest rates at the right time. I don’t think you want to wait until everything is exactly the way you’d expect it to be.”

Fed Chairman Ben Bernanke last month gave a bleak assessment of the economy and left the door open to new bond purchases to boost growth, a move that Bullard said he would support only if the economy worsened further and the threat of deflation re-emerged.

The Fed cut rates to near zero more than three years ago and has bought $2.3 trillion worth of bonds to spur economic activity.

Because the recession was brought on by a collapse in housing that destroyed household wealth, unemployment is likely to stay high and labor markets will improve only slowly even if rates are kept low for years, Bullard said.

Fed will protect U.S. from Europe fallout: Bernanke

WASHINGTON – Europe’s financial crisis still threatens the U.S. recovery, and the Federal Reserve will do everything it can to protect against damage to the economy, Fed Chairman Ben Bernanke said on Thursday.

Bernanke told Congress he was seeing signs that some of the uncertainty limiting U.S. business investment, including European banking woes, might be waning.

But he said it was far too soon to say whether the United States could remain unscathed.

“Risks remain that developments in Europe or elsewhere may unfold unfavorably and could worsen economic prospects here at home,” Bernanke told the House of Representatives Budget Committee.

Bernanke defended the U.S. central bank’s ultra-easy monetary policy from criticism from Republican lawmakers that it risked fueling inflation and undermining the dollar.

He was also taken to task by Republicans for a report the Fed issued last month that offered possible prescriptions to Congress and regulators on how to fix the housing market.

The U.S. economy accelerated in the fourth quarter and job growth has picked up, but the unemployment rate still stood at a lofty 8.5 percent in December – a level Bernanke made clear the U.S. central bank was not satisfied with.

He warned the debt troubles in Europe risked undermining the U.S. recovery.

“We are in frequent contact with European authorities, and we will continue to monitor the situation closely and take every available step to protect the U.S. financial system and the economy,” Bernanke said.

European leaders are haggling over how best to erect a firewall to prevent their debt crisis from spreading. At the same time, Greece is under pressure to clinch a deal with private creditors to make its debt load more manageable.

Many economists believe austerity moves throughout the euro zone have already tipped the region into recession.

Federal Reserve seen indicating no rate hikes until 2014

WASHINGTON – The Federal Reserve opened a two-day meeting on Tuesday that is expected to end with a signal that interest rates will be held near zero into 2014.

Outside of words, however, the central bank appears unlikely to take any action to prop up the economy, although some officials have raised the prospect that more bond purchases will be needed.

For the first time, the Fed will release policymaker projections for the path of the benchmark federal funds rates at the conclusion of the meeting on Wednesday. It will also lay out views on when the first rate hike should occur.

Also, in what would be a historic shift, it may also announce an agreed target for inflation, which would likely be in the 1.7 percent to 2 percent that the majority of Fed officials have already said is desirable.

Fed officials began their meeting at 10 a.m., a Fed spokesperson said. A policy statement is due at 12:30 p.m. on Wednesday, and that will be followed by a news conference by Fed Chairman Ben Bernanke and the publication of policymakers’ quarterly forecasts.

The central bank cut the federal funds rate to near zero in December 2008 and has bought $2.3 trillion in bonds in a further effort to spur stronger economic growth.

The U.S. economy strengthened toward the end of last year, and the unemployment rate dropped to a near three-year low of 8.5 percent in December.

Fed’s Dudley: potential for more action on mortgages

NEW YORK ― The weak housing sector continues to pose a strong headwind to the U.S. economic recovery, and the Federal Reserve could potentially do more to drive down mortgage rates to support the sector, a top Federal Reserve official said on Monday.

William Dudley, president of the New York Federal Reserve Bank, also warned about the risks of “spillover” effects from Europe’s debt crisis.

Dudley’s comments marked the second time in a week that a Fed policy maker highlighted the possibility that the U.S. central bank could do more to support the housing market.

Housing has been a persistent headwind to the U.S. economic recovery. A glut of foreclosed homes on the market and tight credit have contributed to a sector virtually stuck in the mud and unable to gain traction.

“Breaking this vicious cycle is one of the most pressing issues facing policy makers,” Dudley said in a speech at Fordham University’s Gabelli School of Business in New York.

“Clearly we’ve indicated our interest in supporting the housing market in keeping mortgage rate spreads, and spreads between mortgage rates and Treasury yields, from getting too elevated,” Dudley said.

“Depending on how the world evolves, we potentially could move to do more in that direction.”

Dudley, who as head of the New York Fed has a permanent voting seat on the Fed’s policy-setting committee, said the U.S. central bank will continue to do everything within its power to help the economic recovery.

Dudley’s comments come on the heels of remarks by Fed Governor Daniel Tarullo last week that there was “ample room” for policy makers to do more to spur economic growth and that more mortgage-related securities purchases should be on the table.

Faced with the worst recession in decades, the Fed in late 2008 cut rates to near zero and has since bought $2.3 trillion in bonds to spur a recovery.

U.S. central bank officials regularly cite housing as having hamstrung the recovery from the worst recession in decades. But the purchase of mortgage securities was a controversial part of the first round of quantitative easing in 2009, and some officials criticize it for propping up a specific sector of the economy.

Speaking in the New York City borough of the Bronx, Dudley called the housing market “a serious impediment” to a stronger recovery, which this year has been plagued by “quite disappointing” growth in gross domestic product.Yet the rebound has been weak and is now threatened by Europe’s debt crisis, casting doubt on the central bank’s strategy and effectiveness but also raising some expectations for more asset purchases.”The Fed is doing — and will continue to do — everything within its power to promote jobs and price stability,” said Dudley.