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Fed presidents indicate new round of stimulus is likely

WASHINGTON — Three Federal Reserve regional presidents Tuesday reinforced the idea that policymakers will start a second round of unconventional monetary stimulus, with two saying asset purchases must be big enough to aid the economy.

Chicago Fed President Charles Evans said the central bank would need to buy securities on a large scale several times to carry out his preferred strategy of aiming to raise inflation temporarily. Atlanta Fed President Dennis Lockhart said in a CNBC interview that a pace of $100 billion of purchases a month is "in the range of numbers one might consider."

Separately, William Dudley, New York Fed president and vice chairman of the central bank's policy-setting Federal Open Market Committee, said his Oct. 1 assertion that officials will probably need to add stimulus "still stands." While Evans and Lockhart don't have FOMC votes this year, all three presidents have aligned in prior decisions with Fed Chairman Ben S. Bernanke, who said Oct. 15 that there appears to be a "case for further action."

"They wouldn't be talking about it in such a way if they weren't on the verge of engaging in another round of asset purchases," said Tom Porcelli, an economist at RBC Capital Markets in New York.

Two other Fed bank presidents, Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis, continued to express skepticism about the efficacy of further asset purchases. Fisher said policymakers are still debating the issue and may not make a decision next month.

Porcelli said he expects the Fed after the Nov. 3 meeting will announce the resumption of asset buying in a "piecemeal approach" that will eventually accumulate to $1 trillion in purchases. The Fed bought $1.7 trillion of Treasuries and mortgage debt through March.

Fed officials are debating whether and how they can boost growth that's too slow to bring down unemployment persisting near a 26-year high. The FOMC said in its last statement Sept. 21 that inflation was "somewhat below" levels consistent with the Fed's legislative mandates for stable prices and maximum employment in the long run.

Evans restated his support for "price-level targeting," in which the Fed would commit to higher inflation for a time to make up for inflation that was too low.

Dudley said in an Oct. 1 speech that $500 billion of purchases would add as much stimulus as reducing the Fed's benchmark rate 0.5 to 0.75 percentage points, depending on how long investors expect the Fed to hold the assets. The central bank lowered its benchmark rate to near zero in December 2008 and has pledged to keep it low for an "extended period."

Fed presidents indicate new round of stimulus is likely 10/19/10 [Last modified: Tuesday, October 19, 2010 9:01pm]
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