Three Federal Reserve members now back greater fiscal stimulus if the economy continues to sour.
At a dinner at the Boston Economic Club tonight, Vice Chairmen of the Federal Reserve Janet Yellen said the Fed could have to continue easing monetary policy.
“Prolonged weakness in the housing sector remains one of several serious headwinds facing the U.S. economy,” Yellen said. “Given these headwinds, I believe that a highly accommodative monetary policy will be needed for quite some time to help the economy mend.
Yellen is joined by Dennis Lockhart and John Williams, presidents of the Fed’s Atlanta and San Francisco districts, in pushing for greater stimulus.
“Should it become clear that something resembling my baseline scenario of continued, though modest, growth is no longer realistic, further monetary actions to support the recovery will certainly need to be considered,” Lockhart said in a speech today in Fort Lauderdale, Fl.
Separately, Williams believed the Federal Reserve would fall short of its goals for maximum employment and tame inflation — particularly as difficulty in Europe deepens and a fiscal cliff in the U.S. approaches.
If inflation remains below the Fed’s 2 per cent target, accommodation “would be warranted,” he says.
“In such circumstances, an effective tool would be further purchases of longer-maturity securities, potentially including agency mortgage-backed securities,” Williams says. “Past purchases have succeeded in lowering borrowing costs and improving financial conditions, thereby supporting economic recovery.”
That action could come as soon as this June, Morgan Stanley’s top economist Vincent Reinhart says. With the election looming, Reinhart notes it could be difficult for the Fed to continue easing from August through October.
“Responding to deterioration in financial conditions is a tactical move, and if the Fed does not do so at the June 19 and June 20 meeting, the odds against it go up further,” he said.
However, other economists, including Bank of America Merrill Lynch’s Michelle Meyer, believe the Fed is not yet ready to announce changes to policy at its two-day June meeting.
“I think that if the economy does what we think it will, which is continue to slow, reach about 1 per cent GDP growth by the fourth quarter, I think QE is inevitable. The Fed can’t sit idle,” Meyer said in an interview this week. “By the August 1st meeting or even September, the data could be weak enough that it does prompt Fed action despite the election.”
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