Fed Presidents Differ Over Bank’s Ability to Boost Growth

Two Federal Reserve policy makers differed over the central bank’s ability to boost growth, with one calling for more action to fight a “massive” shortfall in employment and the other saying further steps would probably serve only to stoke inflation. “If we sit on our hands as the economy withers relative to our mandate, then we could take a huge hit to our credibility,” said Charles Evans, head of the Chicago Fed, invoking the damage to the central bank’s reputation during the Great Depression. The Richmond Fed’s Jeffrey Lacker said there’s little more the Fed can do because “the strength of this recovery is going to be relatively independent of our monetary policy choices.” The contrasting views reflect the depth of disagreement on the policy-making Federal Open Market Committee as Fed Chairman Ben S. Bernanke leads efforts to reduce an unemployment rate stuck near 9 percent two years after the end of the recession. The last two decisions to ease policy drew three dissents, the most opposition in almost 19 years. The two policy makers, in separate speeches yesterday, offered contrasting views of Fed moves so far. “I believe we have done the right thing,” Evans said in a speech in Detroit. Lacker, speaking in Salisbury, Maryland, said he disagreed with the Fed’s decision last month to lengthen the maturities of the bonds in its portfolio in a bid to lower long-term interest rates.

The Fed’s so-called “Operation Twist” plan is a “very important” way of demonstrating a willingness to be accommodative, without expanding the central bank’s balance sheet, Evans, 53, said at a dinner held by the Michigan Council on Economic Education. “If it’s not doing enough, we need to do more.” By contrast, Lacker, appearing at the Salisbury-Wicomico Economic Development Annual Meeting, said the “factors likely to be restraining growth -- from empty houses to prospective tax rates -- are nonmonetary and largely beyond the power of the central bank to offset through easier monetary conditions.” “History has repeatedly demonstrated that if a central bank attempts to add monetary stimulus to offset nonmonetary disturbances to growth, the result is higher inflation,” the Richmond Fed chief said. Lacker’s opposition to further monetary easing aligns him with Minneapolis Fed PresidentNarayana Kocherlakota, Richard Fisher of Dallas and Charles Plosser of Philadelphia, who dissented from the decision to launch Operation Twist.

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