–Addtl Policy Accommodation Warranted Under Present Circumstances
–Circumstances Have Called For ‘Forceful’ Measures
–Fisc, Mon Authorities Shld Be Wide Array Of Job Creation Approaches
–Estimated Effects Of FOMC Actions Subject To ‘Considerable’ Uncert

By Brai Odion-Esene

WASHINGTON (MNI) – The economic recovery in the United States has
fallen “well short” of restoring labor market conditions to historically
typical levels, making the Federal Reserve’s deployment of its policy
tools “completely appropriate in promoting maximum employment and price
stability,” Fed board Gov. Sarah Bloom-Raskin said Monday.

In remarks at the University of Maryland’s ‘Distinguished Speaker
Series’ in Washington, Raskin said both fiscal and monetary policymakers
should be considering “a wide array” of measures to encourage job

“The increases in economic activity over the past two years have
been at a rate insufficient to achieve any sustained reduction in the
unemployment rate,” she said. “These circumstances have called for
forceful policy measures.”

And although Raskin noted that the effectiveness of monetary policy
might be attenuated by excess housing supply and impaired access to
credit, she said that should not be taken to mean additional monetary
accommodation would be unhelpful.

“Indeed, the opposite conclusion might well be the case — namely,
that additional policy accommodation is warranted under present
circumstances,” she said.

“In light of the economic hardships that are facing our nation, I
want to underscore that the Federal Reserve is fully committed to doing
everything we can to promote maximum employment in the context of price

She went on to warn, however, that the estimated effects of the
Federal Open Market Committee’s policy actions are subject to
“considerable uncertainty.”

“Such uncertainty is intrinsic to real-world monetary policymaking
at any time but is particularly relevant under circumstances where the
scope for conventional monetary policy is constrained by the zero lower
bound on the federal funds rate, leaving unconventional tools as the
only means of providing further monetary accommodation,” she said.

Expanding further on the subject, Raskin noted that the magnitude
of the transmission from the Fed’s success in forcing down interest
rates to economic growth and employment “has been somewhat more muted
than I might have expected.”

She pointed the finger at a number of “unusual persisting
factors,” including the aforementioned excess housing supply and
impaired credit access, saying it seems plausible that the effectiveness
of the Fed’s policy actions is being attenuated by these conditions.

The housing sector has remained “exceedingly weak,” Raskin said,
and predicted that, as a result, the excess supply of housing seems
likely to decline only gradually despite the record-low level of
mortgage rates.

This in turn has restrained consumer spending, she added, as the
excess housing inventory has put a downward pressure on home equity
values and household wealth.

“The slow progress in repairing and restructuring households’
balance sheets may also be lowering the normal responsiveness of
consumer spending to a decline in market interest rates,” she said.

And with banks maintaining relatively tight lending terms and
credit standards for consumer loans, Raskin said many households may be
unable to take advantage of the lower borrowing rates “that are
available to those who have a high net worth and pristine credit

So the combinations of widespread unemployment, housing and stock
price declines, and the increasing rates of mortgage defaults,
foreclosures, and bankruptcies, means a slower revival of normal
consumption patterns that would fuel increases in consumer demand and
growth, she said.

To counter these factors, Raskin suggested that there is there is
“a compelling case to identify and implement policy measures to mitigate
those factors and thereby strengthen the effect of the monetary
accommodation that we have already put in place.”

Although Raskin took issue with the practice of labelling members
of the FOMC ‘doves’ or ‘hawks’ — calling it “ill conceived and
misleading” — she clearly came down on the side of the doves in her
remarks, saying monetary accommodation leads to greater job creation,
although sometimes with substantial lags.

The FOMC has been deploying its conventional policy tool — keeping
interest rates at close to zero — “to the maximum extent possible”
since late 2008, she said, and saved millions of jobs that would have
otherwise been lost.

She went on to argue that given the magnitude of the global
financial crisis and its aftermath, the Fed clearly needed to provide
additional monetary accommodation beyond simply keeping short-term
interest rates close to zero.

The most recent move was the Fed’s announcement that by June 2012,
it would extend the average maturity of the securities on its balance
sheet by selling $400 billion of short-term Treasury securities and
purchasing an equivalent amount of long-term Treasury securities.

“This maturity extension program — referred to by some as
Operation Twist — should exert downward pressure on longer-term
interest rates and help make broader financial conditions more
accommodative, thereby supporting a stronger economic recovery,” Raskin

The Fed also said that principal payments from its holdings of
agency securities will now be reinvested in agency MBS rather than in
Treasury securities, and Raskin said the announcement appears to have
been successful in narrowing the spread between rates on agency MBS and
Treasury securities of comparable maturity.

Such advance communication by the central bank is vital, Raskin
said, as forward guidance “can be a potent tool of monetary policy.”

“In my view, the deployment of our monetary policy tools needs to
be carefully gauged, appropriately timed, and clearly communicated to
the public,” she said. “Clear communication can help anchor the public’s
long-term inflation expectations and hence improve the extent to which
the central bank can take forceful actions to promote job creation in a
context of price stability.”

In addition, she said forward guidance — such as the FOMC
indicating rates will remain low until at least mid-2013 — can provide
monetary accommodation by leading investors to expect a longer period of
low interest rates.

So good communication is essential for strengthening the
effectiveness of monetary policy, Raskin concluded.

** Market News International Washington Bureau: 202-371-2121 **

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