A Debate in the Open on the Fed
By BINYAMIN APPELBAUM
RICHMOND, Va. — Federal Reserve officials regularly air their views in public speeches, but they rarely engage in public debates. On Tuesday night, two of the officials who disagree most sharply about the Fed’s current policy did just that.
The exchange between Charles L. Evans, an outspoken advocate for the Fed’s efforts to stimulate the economy, and Jeffrey M. Lacker, the Fed’s most persistent internal critic, suggested their differences are as much a matter of temperament as economics.
Mr. Lacker, the president of the Federal Reserve Bank of Richmond, said he did not expect the economy to recover the losses sustained during the recession. “It’s hard to talk about the economic outlook without being a little bit of a sourpuss,” he said during a panel discussion sponsored by Virginia Commonwealth University.
Mr. Evans, the president of the Chicago Fed, describing himself as “the happy guy in the room,” said the recovery had been postponed rather than canceled.
Mr. Lacker said he doubted monetary policy had more power to increase growth.
Mr. Evans said the Fed had an obligation to try because unemployment remained high.
Mr. Evans said the Fed would have sufficient warning of inflationary pressures to keep price increases under control. Mr. Lacker said he was worried the Fed was overconfident about its ability to manage the risk.
Both men emphasized that their views could prove to be wrong.
Their basic difference is about whether it would be better to do too little or too much.
The Fed is trying to stimulate the economy by suppressing interest rates, reducing borrowing costs and encouraging risk-taking. It intends to hold short-term rates near zero at least as long as the unemployment rate remains above 6.5 percent. The rate stood at 7.7 percent in February. To hasten that process, the Fed also is buying $85 billion a month of Treasury and mortgage-backed securities.
The Fed’s course continues to be set by its chairman, Ben S. Bernanke, and a centrist majority he has carefully assembled who regard asset purchases as necessary and effective. In recent months, Mr. Bernanke and his supporters have argued forcefully that the risks of doing too little exceed the risks of doing too much.
“I do not claim that there are no costs or risks associated with our unconventional monetary policy regime,” one of Mr. Bernanke’s closest allies, William C. Dudley, the president of the Federal Reserve Bank of New York, said last month. “But I see greater cost and risk in moving prematurely to a policy setting that might not prove sufficiently accommodative to ensure a sustainable, strengthening recovery.”
Mr. Bernanke said last month that the Fed’s next step is likely to be a reduction in the volume of monthly asset purchases rather than an abrupt cessation. And even that first step may not come for some time.
Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said Tuesday that he thought the Fed would need to keep buying bonds at least until the end of this year, and possibly into next year.
“There are encouraging developments in the economy, to be sure, but the evidence of sustainable momentum that will deliver ‘substantial improvement in the outlook for the labor market; is not yet conclusive,” Mr. Lockhart said. “I favor a ‘wait and watch’ mode for the time being. Several more months of positive data — especially in a range of employment data — would give me confidence that the economy has real traction and is unlikely to backslide.”
Mr. Evans made clear that he, too, wants the Fed to keep buying bonds. He has said that the central bank needs to demonstrate that its commitment to reduce unemployment equals its commitment to control inflation.
The Fed is charged by Congress with minimizing unemployment, which has persisted at high levels since the financial crisis, and stabilizing prices.
“Our credibility will ultimately be judged by how we do on both of these mandates, not just the price mandate,” Mr. Evans said Tuesday night. “I think we will be judged very badly” if officials do not act forcefully to reduce unemployment and instead, he said, “worry obsessively” about inflation.
Only one Fed official has gone further than Mr. Evans and suggested that the Fed should increase its efforts to stimulate the economy.
Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, reiterated in a speech Tuesday that the Fed should hold short-term rates near zero at least so long as the unemployment rate was above 5.5 percent, one percentage point lower than the Fed’s current 6.5 percent threshold.
Mr. Lacker, by contrast, said Tuesday night that he saw little evidence the Fed’s efforts were helping the economy. He said that reflected the limits of monetary policy, particularly the experimental strategies the Fed has deployed in recent years. He also noted that the Fed had repeatedly overestimated the strength of the recovery.
“There’s little more that we can do,” Mr. Lacker said of monetary policy. “There’s little more that we can contribute to growth.”
