FOMC members stress need for stronger medicine to cure US economic ills

At the Sasin Bangkok Forum yesterday, Boston Fed president Eric Rosengren and Chicago Fed president Charles Evans supported stronger action from the US central bank.
“I would have preferred an even stronger step, such as the purchase of more mortgage-backed securities,” Evans said during a luncheon talk on “A Perspective on the Future of Monetary Policy and the Implications for Asia”.
Expanding the US$2.9-trillion (Bt92-trillion) balance sheet is referred to by markets as QE3, and Evans has for some time been a strong advocate of the Fed doing all it can to generate better economic growth.
While global economies, particularly small emerging ones, are fretting over further monetary easing, as this would result in excess liquidity and greater volatility in international fund flows, Evans said that 15 years ago during the Asian crisis, US consumers absorbed the effects with the sudden appreciation of their dollar. “There are no more such consumers in the US,” he said, as Americans are squeezing their own budgets and fighting against the gloomy economic outlook.
He said the Fed’s mandate was to ensure maximum employment while keeping inflation low. The latest data are “discouraging” and the chance for a quick recovery is slim.
“I support a conditional approach, whereby the Federal Funds Rate is not increased until the unemployment rate falls below 7 per cent, at least, or until inflation rises above 3 per cent over the medium term,” he said.
Rosengren also strongly endorsed a strong Fed response, including the expansion of Operation Twist.
“Apparently, firms have become more tentative in the face of growing global economic uncertainties,” he said, adding that some American workers had been unemployed for more than three years.
“Significant excess capacity” remains in the US labour market, and job growth has “slowed fairly noticeably” in the past few months, the policy-maker said.
While the Fed did not launch a third controversial round of large-scale bond buying – known as quantitative easing, or QE3 – as some expected last month, its policy-setting Federal Open Market Committee (FOMC) did lower expectations for US growth and inflation, and raised that of unemployment.
Both Evans and Rosengren are non-voting members of the FOMC.
Their comments followed the release of disappointing jobs data on Friday.
“The damage intensifies the longer that unemployment remains high. Failure to act aggressively now will lower the capacity of the economy for many years to come,” Evans said, adding that more stimulus measures were needed, even though that would pressure long-term interest rates. “If the economy goes up, it could go up by as much.”?? As what??
He said stronger medicine was vital, as the euro crisis was the most substantial risk to the US economy, and the problems lay with the complexities of many countries. On the sidelines is the political wrangling between the two main US political parties over fiscal budget cuts, the results of which are expected to be known after this year’s presidential election.
Rosengren noted that a quick resolution “may remain elusive” for Europe’s sovereign debt concerns, for the large deficits in many countries, and for global banking problems. “This suggests that slow growth is likely to continue for quite some time.”