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# Two Fed officials defend latest easing measure

1. September 26, 2011
2. By Mark Felsenthal
3. REUTERS
4. http://www.reuters.com/article/2011/09/26/usa-fed-idUSS1E78P0UE20110926

WRAP-UP:
* Raskin: Fed easing actions "completely appropriate"
* Transmission of Fed efforts has been muted
* Bullard also says ultra-loose policy appropriate

Two top Federal Reserve officials on Monday defended the U.S. central bank's most recent effort to boost growth, and one suggested further steps may be justified.

The Fed last week announced it would weight its $2.85 trillion portfolio more heavily with longer term securities in an effort to drive borrowing costs lower, warning of "significant" downside risks to the economy, Fed Governor Sarah Raskin and the president of the St. Louis Federal Reserve Bank, James Bullard, both defended that move as warranted given the U.S. 9.1 percent unemployment rate. Raskin hinted she would support more action. "Additional policy accommodation is warranted under present circumstances," Raskin said at an event sponsored by the University of Maryland's Smith School of Business. Noting that aggressive Fed efforts to foster stronger growth and bring the jobless rate down have been muted by declines in home values and consumer reticence, she said the Fed's policies are "completely appropriate" to help spur more robust growth. The comments from Raskin and Bullard, who called the Fed's ultra-loose monetary policy "appropriate," are the first direct remarks on monetary policy from Fed officials since the central bank launched its latest program on Wednesday. While support for the Fed's accommodative stance is to be expected from Raskin, who is associated with the central bank's employment-focused "doves," the endorsement by policy centrist Bullard indicates solid support for the latest monetary easing, despite the three dissenting votes the decision drew at last week's meeting. One of those dissenters, Minneapolis Fed President Narayana Kocherlakota, spoke in Chicago on Monday, but he did not comment on the outlook for the economy or monetary policy. In remarks at a [CME Group-MSRI Prize] seminar on sovereign debt, held at CME Group Inc's headquarters, he argued that "a sufficiently tough central bank" can control inflation regardless of the behavior of the fiscal authorities, but would need to be ready to allow the government to default in order to maintain that control. RECESSION FEARS GROWING The U.S. economy grew at less than a 1.0 percent annual rate over the first half of the year, and forecasters think it is plodding along at a sub-2.0 percent pace now. Employment growth braked to a halt last month, raising recession fears. Fears of a renewed downturn are growing around the world as well. Reports in Europe and China showed private sector business activity declined sharply this month as the euro zone debt crisis and the stalling U.S. recovery hit confidence. Despite heightened risks, the Fed's decision to stay active in boosting economic growth is controversial and will get a full airing in speeches scheduled over the course of the week, with the other two dissenters scheduled to make public comments in coming days. Outside the Fed, Republican congressional leaders last week had urged the Fed to stay on the sidelines, saying its aggressive actions may have done more harm than good by risking inflation. Raskin on Monday challenged politicians to contribute to efforts to lowering the jobless rate. Both fiscal and monetary policymakers should be considering a wide array of approaches for fostering job creation, she said. The Fed last week announced$400 billion in long-term bond purchases matched with sales of the same amount of short-term securities in a bid to push down longer-term interest rates. It also said it would resume buying mortgage-related debt in an effort to help depressed housing markets recover.

Even so, the Fed stopped short of an outright third round of bond purchases. Bullard, speaking at a conference in New York, said a fresh round of buying would be "a potent tool," suggesting the Fed may yet resort to that measure, although it would likely draw loud objections from critics who see it as setting the stage for a damaging surge in inflation.

The Fed cut benchmark short term rates to near zero almost three years ago and has bought \$2.3 trillion in longer term assets to further stimulate economic activity.

Despite the three dissenting votes at last week's meeting, a core group believes the central bank should do what it can to prevent persistently high unemployment from slowing growth to the point the economy slides back into recession.

Fed officials are discussing measures including giving specific targets for unemployment and inflation that would reassure markets that the Fed won't quickly change the course of its ultra-loose policy.

Raskin said she would not support any policies that would permit inflation that is higher than what the Fed believes is optimal -- 2.0 percent or a bit less.

"Raising inflation or raising inflation expectations ... is something I would be quite leery of," she said on Monday in response to questions after her speech. "Keeping inflationary expectations anchored is in my mind extremely important." Bullard similarly said a higher target for inflation would not help achieve the Fed's goal of stronger growth.