Two top Fed officials on Friday offered divergent signals on interest rates, with one arguing they should remain near zero for at least six months and another wishing to raise them sooner rather than later.
Charles Evans reiterated the central bank's commitment
to keep borrowing costs at exceptionally low levels for an extended period, which he defined as lasting three or four Fed meetings or at least six months.
I still think it's going to be an extended period of time that interest rates are going to be low, Evans, the Chicago Federal Reserve Bank president told CNBC television.
It's a time of still too much uncertainty. Consumers are being very careful with the labor market situation, he said.
The comments echoed those of Federal Reserve Chairman Ben Bernanke who this week told Congress a weak job market and low inflation were likely to warrant exceptionally low rates for some time.
However, Thomas Hoenig, the head of the Kansas City Fed and an anti-inflation hawk, said he was worried the central bank's ultra-low rates policy carried some risks of its own.
I don't think it's necessarily in our interest to assure the markets that rates will be zero and they can play the yield curve, because while it has intended effects of assuring the markets that they can invest, it also invites and sometimes incites speculative activity and that's what we have to be careful of, Hoenig said in response to viewers' questions on C-SPAN, a cable television channel.
The Fed slashed interest rates close to zero in an effort to combat the worst financial crisis in generations, in addition to implementing a host of unorthodox lending programs.
One of the issues that I have dealt with is how do we bring interest rates back to a more long-term sustainable level from their extremely low and obviously unsustainable levels, he said.
The comments highlight the ongoing internal debate at the U.S. central bank. Bernanke said this he would like to see private demand pick up in the economy before policymakers can be certain the recovery is self-sustaining.
One of the issues confronting Fed officials is whether credit markets can operate on their own. Investors have reacted relatively well to the expiration of some key Fed liquidity programs, but it is unclear whether an outright push toward tighter policy might derail the recovery.
A group of prominent economists said unsettled U.S. financial conditions are more of a drag on the economy than generally believed.
They proposed central bankers pay closer attention to an updated financial conditions index which factors in variables affecting firms outside the traditional banking sector.
The message here is that financial conditions are not as easy as the standard indicators suggest, said one of the economists, Deutsche Bank's Peter Hooper.
The Fed is depending on healing financial markets to help support recovery from a painful recession. Evidence of lingering financial malaise will make it harder for policymakers to budge from easy money policies any time soon.
A financial conditions framework would likely be useful when evaluating the economic outlook and the conduct of monetary policy, New York Federal Reserve Bank President William Dudley said, commenting on the proposal.
Developments in the financial markets became very important in the conduct of monetary policy, said Dudley, a former partner at Goldman Sachs.
Another top policymaker, Minneapolis Fed Bank President Narayana Kocherlakota said different disruptions in financial conditions call for different responses by policymakers.
Central bankers might need to act differently in response to a drop in property values than they would if assets became less liquid, Kocherlakota said. No single financial conditions index can capture fluctuations among different types of strains, he argued.
In a separate discussion on regulatory reform, Chicago's Evans said proposals to strip the Fed of its regulatory authorities could place it under pressure to use interest rates to curb risky activities.
The comments were part of a broader effort by regional Fed officials to convince a skeptical Congress not to remove the Fed's legal authority to regulate large banks.
A measure in the Senate aimed at doing just that appeared to be losing momentum, with Richard Shelby, a prominent Republican senator and fierce critic of the Fed, telling reporters on Thursday he was warming up to the idea of allowing the Fed to continue acting as a regulator.
Senate Banking Committee Christopher Dodd on Friday echoed that message, telling Bloomberg television the Fed would not necessarily lose bank supervision powers, adding that there could be room for compromise.
James Bullard, head of the St. Louis Fed, joined the chorus of Fed pleas, arguing in a letter to top senators that the central bank's regulatory function was crucial to its mission as a guarding of financial stability.