–SF Fed’s Williams: Should Keep Stimulus in Place For Some Time
–Atlanta Fed’s Lockhart: Must Balance Infl Risk With Need for Stimulus
–Philly Fed’s Plosser: More Optimistic on Outlook, See 3% Growth

By Steven K. Beckner

SANTA BARBARA, California (MNI) – A trio of Federal Reserve Bank
presidents Thursday expressed different points of view about monetary
policy and what it can do to enliven a still struggling economy and
reduce unemployment.

San Francisco Federal Reserve Bank President John Williams, a
voting member of the Fed’s policymaking Federal Open Market Committee,
reiterated his belief that the FOMC needs to keep providing “strong”
monetary stimulus “for quite some time,” although he did not
specifically call for additional injections of reserves into the economy
at this time.

Atlanta Fed President Dennis Lockhart, also an FOMC voter, sounded
much more skeptical about the need for additional monetary easing at
this time.

Also on a panel at an economic summit sponsored by the University
of California-Santa Barbara was Philadelphia Fed President Charles
Plosser, who is known to oppose further easing. He did not do so in his
prepared remarks but noted that fewer FOMC participants now project the
federal funds rate will remain near zero after 2014 than in January:
four now compared to six previously.

“The nation remains far from the Fed’s assigned goal of maximum
sustainable employment,” Williams said in prepared remarks. “Under these
circumstances, and with inflation close to our 2% target and well under
control, it’s essential that we keep strong monetary stimulus in place
for quite some time.”

The Fed needs to focus much more on the maximum employment side of
its dual mandate, not the price stability side, he suggested.

“Over the past few decades, we’ve done pretty well on our price
stability objective,” Williams said. “Indeed, despite the turmoil of the
past five years, inflation has averaged almost exactly the 2% rate that
the Federal Open Market Committee designated as our medium-run target.

“However, we are still very far from our maximum employment
mandate,” he said. “Despite recent progress in the labor market, the
unemployment rate remains far too high.”

Lockhart, who has been saying lately that he is “reticent” about
supporting a third round of quantitative easing, continued to express
his agnosticism about QE3 in his prepared remarks.

“The Fed’s already done a lot to support the recovery,” he said.
“Whether additional monetary policy actions should be used at this time
to try to speed things up has to be balanced against the risks to the
Fed’s price stability objective that could accompany an overestimating
of the amount of economic slack-particularly labor market slack.”

Lockhart went on to pose a number of questions he and his fellow
monetary policymakers will need to address:

* “How much of an employment gap is there?”

* “Can additional monetary policy actions close it?”

* “Is the pace of closure under current policy acceptable?”

* “If not, what more can and should be done?”

Williams said the U.S. economy is still suffering from a
“breathtaking” housing “meltdown,” as well as “tight credit,” government
contraction and business uncertainty about not just the economic outlook
but also the outlook for taxes and the European debt situation.

Williams disputed contentions of some Fed officials and economists
that unemployment is primarily “structural.” If it were, monetary policy
might not be able to do much to reduce unemployment. But that is not the
case, he argued.

He said “structural” forces such as job mismatches have likely
raised the “natural” pre-recession unemployment rate from 5% to between
6% and 6.5%. But he said “today’s unemployment rate is about two
percentage points above my estimate of the natural rate.”

“That is, the elevated rate of unemployment is primarily due to a
shortage of demand, not to structural changes in the labor market,” he
said, implying that a shortage of demand is something the Fed can do
something about.

In contrast to Plosser, who projected unemployment will fall to 7%
by the end of 2013, Williams doubted it will reach that level until the
end of 2014.

Lockhart acknowledged the seriousness of the unemployment problem
but was less certain about the efficacy of additional monetary stimulus.

He cited a number of ingredients in the unemployment problem.

“On the demand side, many businesses that existed five years ago
are gone, and with their disappearance many jobs were permanently lost,”
he said. “Some amount of job destruction from business failures is a
normal occurrence, but many new businesses that would have been
established in less stressed times and that would have replaced the lost
jobs were not born. Start-ups have been fewer because of a weak economy
and difficulty getting financing.”

And he said “the productivity gains by individual firms mean that
increasing sales don’t result in the same increase in hiring as in the
past. In many instances, businesses have invested in technology that
eliminated the need for certain types of jobs, and the skills these
firms now demand may be quite different than in the past.”

At the same time, though, Lockhart said he hears “a lot of
anecdotal accounts of businesses having difficulty finding qualified

“On the supply side, the recent decline in the unemployment rate is
partly attributable to a decline in the share of the working age
population actively engaged in the labor market,” Lockhart said. “It’s
also argued that some of the decline may reflect discouragement of job
seekers about wage and employment prospects. Participation is at its
lowest level since the 1980s.”

Lockhart said “the relatively modest economic expansion that has
followed the recession — an extremely deep recession — is the primary
factor restraining job growth,” but the Fed has “already done a lot” to
address that.

He said he and his fellow policymakers “have to grapple with the
messiness of labor market reality while balancing the two objectives of
the committee’s dual mandate.”

Plosser said he is “more optimistic” than many of his colleagues,
although he noted that the FOMC’s revised April economic forecasts were
“an upgrade” from January.

“My own views place me in the slightly more optimistic camp,” he
said. “My outlook is for about 3% growth in both 2012 and 2013.”

“I predict that inflation will hover near or slightly above 2% over
much of the period,” Plosser said. “My optimism is most evident in my
projections for the unemployment rate. I believe that it will continue
to drift down gradually, reaching 7.8% by the end of this year and near
7% by the end of 2013.”

Plosser expressed approval of the steps the FOMC has taken to
increase transparency, but repeated his call for a “reaction function”
to replace the calendar date for the extent of the zero federal funds
rate period.

Noting that the FOMC has said it will take a “balanced approach” if
unemployment and inflation conflict, he advised, “I suggest that the
public watch the assessments of the appropriate policy as viewed by
policymakers in the SEP as an important source of information in this

** MNI Washington Bureau: 202-371-2121 **

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