TOKYO (MNI) – Notwithstanding last week’s unusual 30,000 plunge in
first-time jobless claims, which some have attributed to a quirk in
claims reporting by the state of California, underlying economic trends
would seem to remain conducive to continued, if not expanded, U.S.
monetary stimulus. There has certainly been no indication from Fed
officials that they have become significantly more upbeat about the
economic outlook.

The Fed’s latest “beige book” survey, findings of which will be
reviewed by Fed policymakers at the Oct. 23-24 Federal Open Market
Committee meeting, reported that the economy has continued to grow but
only “modestly,” with consumer spending “flat to up slightly” and
employment “little changed.”

The economy is believed to have grown at a roughly 1.8% annual rate
in the third quarter — an improvement over the second quarter but still
too slow to reduce unemployment appreciably.

Fed Vice Chairman Janet Yellen, speaking on the sidelines of the
annual meetings of the International Monetary Fund and World Bank, did
not sound like someone who is eager to retreat from easy money policies.
She said the U.S. and other industrial economies are “operating well
short of potential” because they face “a severe shortfall of demand.”
And she defended the Fed’s policies, up to and including the FOMC’s
Sept. 13 launch of a $40 billion monthly third round of “quantitative

Yellen said she and most of her FOMC colleagues believe “the most
important thing can do is to act aggressively… once interest rates
have been brought down to zero” to “avoid an excessive decline in
inflation expectations.” So, she said, “we’ve tried to be quite
aggressive and forward leaning… to stimulate the economy and not let
inflation fall below the level that we’ve deemed desirable, which is

Fed Governor Jeremy Stein, in his first policy speech since joining
the Board of Governors May 30, also staked out a position favoring asset
purchases on the grounds that they reduce term premiums and long-term
yields, in turn boosting stock and other asset prices. He acknowledged
that asset purchases can have “diminishing returns,” but said “our
recently announced policy of MBS purchases, coupled with the change in
our forward guidance, are strong positive steps. I am hopeful that these
actions by the Federal Reserve will help to give economic growth a much
needed boost.”

Other officials don’t dispute that the Fed has the ability to lower
long-term rates, but question how much good that will do and whether the
benefits will exceed the costs. Philadelphia Fed President Charles
Plosser said “the Fed’s most recent actions carry significant risks. I
am not forecasting that those risks will necessarily materialize, and I
hope they will not. But if they do, they could prove quite costly to
the economy…. In my view, the potential costs outweigh what appear to
be meager potential benefits of further asset purchases and extended
forward guidance.”

Dallas Fed President Richard Fisher said “hawks like me worry that
our central bank has done far more than what was required and are
concerned about the difficulties we will encounter when we need to
tighten policy and exit from uber-easy monetary policy.” Besides, he
said, the cost of money is not the issue. “The great inhibitor of job
creation is the uncertainty over taxes and spending and regulation that
plagues businesses.”

“Monetary policy is necessary but not sufficient,” Fisher said.
“People have to be incented to use the money that we make widely
available and cheap.”

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