The U.S. economy still needs support from the Federal Reserve's full $600 billion planned bond purchases, despite signs its recovery is becoming self sustaining, top Fed officials said on Monday.
Recent spikes in gas and food price are likely to be short-lived and probably will not trigger a broad rise in costs that would force the U.S. central bank to reverse its ultra-loose monetary policy stance, Chicago Fed President Charles Evans and Atlanta Fed President Dennis Lockhart suggested.
In any event, the U.S. economy still has a lot of slack, and core inflation is low enough to give the central bank policy flexibility, Boston Fed President Eric Rosengren said on a panel late on Monday.
The stubbornly high jobless rate, tepid growth and headwinds ranging from tightening municipal budgets to rising gasoline prices all argued against tighter policy for now, said Rosengren, one of the Fed's most dovish members.
We don't want to take away the accommodation too quickly, Rosengren told the Boston Globe/University of Massachusetts panel on the economy.
The Fed, which has kept short-term rates near zero since December 2008, has been buying U.S. Treasuries since November to push down longer-term borrowing costs and keep the U.S. recovery on track. The program is slated to end in June.
It could be that 600 is just about the right number, Chicago Fed President Charles Evans told reporters at the University of South Carolina, where he taught economics before becoming a central banker.
I won't be surprised if that is in fact the decision. I still think it's a high hurdle to stop short of 600 -- so far I haven't seen it.
Atlanta Federal Reserve President Dennis Lockhart, speaking in Atlanta, struck a similar tone.
I remain satisfied that the current stance of monetary policy is appropriately calibrated to the current and projected state of the economy, Lockhart said in remarks that largely resembled a speech he gave in Florida on Friday. My working assumption continues to be that (the bond-buying program) will be completed as it was originally designed on the same time frame.
Those views were at odds with St. Louis Fed President James Bullard, who said over the weekend that policymakers should consider curtailing the program. Fed policymakers next meet in late April, possibly the last chance they would have to adjust their bond-buying program before its planned end in June.
All three policy-makers said they were not worried about the threat of inflation at the moment, in part because growth in wages, a big part of business costs, has remained so tame.
While short-term measures of inflation have accelerated in the last few months, I hold to the view that this trajectory will not continue, Lockhart said.
Inflation fears have risen recently on a spike in oil and commodities costs, driven in part by political upheaval in the Middle East and North Africa. In the last three months U.S. energy prices have risen at an annual pace of 29 percent, while food is up 14 percent.
Evans, who is a voter this year on the Fed's policy-setting panel, and Lockhart, who is not, both said the Fed would closely monitor measures of consumer price expectations for signs that an inflationary psychology is taking hold.
Rosengren, also a non-voter in 2011, said that there was little Fed policy could do to influence commodity prices that are in the midst of supply shocks such as those created by political unrest or crop failures.
They also said the Fed would reverse policy if it saw any such signs.
If unforeseen price increases alter inflation expectations and these expectations for higher prices boost longer-run underlying inflation, then it may become appropriate to adjust policy, Evans said. But historical evidence suggests such a scenario is unlikely, he said.
For some economists on Wall Street, inflation is already taking hold.
The personal consumption expenditures price index outside food and energy, closely watched by Fed officials, rose just 0.9 percent in the year to February, still far below policymakers' presumed target of 2 percent or a bit below.
I am prepared to support a change in policy if evidence accumulates that the low and stable inflation objective is at risk, Lockhart said.
The U.S. economy expanded at a 3.1 percent annualized clip in the fourth quarter. Rosengren said growth could be similar in the current quarter and get stronger in the remainder of 2011.
The jobless rate, for its part, has come down steadily in recent months, falling to 8.9 percent in February from as high as 9.8 percent late last year.
However, Lockhart said not all of the drop is encouraging, since part of it could be traced to discouraged workers dropping out of the labor force.
Evans said the decline stems more from a decrease in layoffs than vigorous hiring by firms. And Rosengren said the current jobless rate was still high enough to crimp personal consumption, a key component of U.S. growth.
Ideally we want a much stronger labor market than we're seeing, he said.