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The Globe and Mail

Top Fed policy makers differ on QE3’s effectiveness

U.S. Federal Reserve Chairman Ben Bernanke addresses U.S. monetary policy with reporters at the Federal Reserve in Washington September 13, 2012.


Just days after the Federal Reserve launched a third round of bond-buying to boost the lacklustre recovery and bring down unemployment, top Fed policy makers on Tuesday disagreed sharply over whether it would work.

The U.S. central bank last week said it plans to buy $40-billion (U.S.) every month in mortgage-backed securities until the labour market improves substantially.

Known as QE3 because it is the Fed's third round of the bond-buying known as quantitative easing, the program is aimed at pushing down long-term borrowing costs and, eventually, stimulate lending, spending and hiring.

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Fed policy makers broadly agree that unemployment, at 8.1 per cent, is much too high; most agree also that inflation, which has hovered near the Fed's 2 per cent target, is well under control.

But there continue to be deep rifts within the central bank over the best policy response.

"I am optimistic that we can achieve better outcomes through more monetary policy accommodation," Chicago Fed president Charles Evans told a group of local business people on Tuesday at a breakfast sponsored by the Bank of Ann Arbor.

A tireless advocate of further easing for the past few years, Mr. Evans nodded to the Fed's policy-setting panel's overwhelming support for QE3 – the vote was 11-1, with just Richmond Fed president Jeffrey Lacker dissenting.

"It seems like I am a little less outside of the consensus than I was earlier," he told the group.

Indeed, the U.S. central bank could do still more, Mr. Evans said, including stating a tolerance for policies that could produce slightly higher inflation as long as those policies also bring down the jobless rate.

Yet minutes before Mr. Evans was due to speak, Dallas Fed president Richard Fisher, a forceful opponent of further easing, said he would have dissented last week if he had a vote on the policy-setting panel this year.

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"I would argue that it is less impactful right now because you have other things inhibiting businesses from making decisions on capex and employment," Mr. Fisher told CNBC. "I don't think this program will have much efficacy."

The Fed has kept interest rates near zero since December, 2008, promised to leave them there for years to come, and undertaken two rounds of bond purchases totalling $2.3-trillion.

Last week it went further, announcing in addition to its open-ended bond-buying program that it will likely keep rates low through mid-2015, well beyond the point where the economy could be expected to strengthen.

It was a formulation of policy that came very close to one that Mr. Evans has embraced for the past year: a vow to keep rates low until unemployment drops below 7 per cent or inflation threatens to top 3 per cent, and buy bonds if progress on jobs is not fast enough.

On Tuesday, Mr. Evans said he "wholeheartedly" supported the Fed's new policy, even though it did not set explicit targets for labour market improvement.

With U.S. unemployment rate stuck above 8 per cent since early 2009, "This was the time to act," he said.

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Mr. Evans cast the debate over monetary policy as one between optimists who believe further easing can deliver a stronger economy and pessimists who say it will only spark inflation. Pessimists have warned for years about higher inflation, only to have their predictions fall short, he said.

Risks to the U.S. economy are rife: a potential global slowdown, the risk of spillover from Europe's sovereign debt crisis and the looming raft of tax increases and spending cuts set to kick in at the end of the year unless Congress acts. All could shock the economy and send it back into recession, he said.

"We cannot be complacent and assume that the economy is not being damaged if no action is taken," Mr. Evans said.

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