By Steven K. Beckner

(MNI) – The divergent views of Federal Open Market Committee
members were on full display this past week, leaving in doubt the fate
of expanded asset purchases — quantitative easing — by the Federal
Reserve.

Some Fed officials appear willing to go ahead with “QE2″ without
much further delay — unless there is surprising improvement in the
economic outlook in coming weeks or months. Others are more ambivalent
about increasing asset purchases beyond the amounts necessary merely to
keep the Fed’s balance sheet from shrinking.

Still others are quite reluctant to support renewed Q.E.

Meanwhile, help is on the way for advocates of QE, with the Senate
at last confirming San Francisco Fed President Janet Yellen to be Fed
vice chairman and another Obama appointee, Sarah Raskin, to a vacant
seat on the Board of Governors.

The arrival of Yellen and Raskin could conceivably sway the vote,
but there’s still four weeks of statistical and analytical data to watch
and a new forecast yet to make.

There are also things the FOMC could do as interim steps before
proceeding directly to Q.E.

For now, the outcome of the Nov. 2-3 FOMC meeting remains
uncertain.

New York Federal Reserve Bank President William Dudley said Friday
that he doesn’t want to “prejudge” what kind of action he’ll support at
the Nov. 2-3 FOMC meeting, but he left no doubt as to his leanings.

“Viewed through the lens of the Federal Reserve’s dual mandate —
the pursuit of the highest level of employment consistent with price
stability, the current situation is wholly unsatisfactory,” he said.
“Given the outlook that the upturn appears likely to strengthen only
gradually, it will likely be several years before employment and
inflation return to levels consistent with the Federal Reserve’s dual
mandate.”

Dudley, the FOMC vice chairman, went on to say that “both the
current levels of unemployment and inflation and the timeframe over
which they are likely to return to levels consistent with our mandate
are unacceptable.”

In fact, he warned, “the longer this situation prevails and the
U.S. economy is stuck with the current level of slack and
disinflationary pressure, the greater the likelihood that a further
shock could push us still further from our dual mandate objectives and
closer to outright deflation.”

Against that backdrop, Dudley said “further action is likely to be
warranted unless the economic outlook evolves in a way that makes me
more confident that we will see better outcomes for both employment and
inflation before too long.”

He said that action could take the form of either a change in Fed
communication or asset purchases. The former could mean being “even more
explicit with regard to the inflation rate that the Committee views as
compatible with price stability.” Or the FOMC could “go still further
and provide more guidance on how monetary policy would react to
deviations from any stated inflation objective.”

Q.E. could involve purchases of either long-term Treasury
securities or agency mortgage backed securities, said Dudley, who
estimated that “$500 billion of purchases would provide about as much
stimulus as a reduction in the federal funds rate of between half a
point and three quarters of a point.”

If the FOMC does decide to buy more assets, Dudley said that “the
clearer and more credible the framework governing purchases, the greater
the likelihood that market participants would act in a manner that
helped the Fed achieve its objectives.” He said market participants
would have to be confident in “the Fed’s ability to exit when the time
is right.”

Chicago Federal Reserve Bank President Charles Evans, who will be a
voting member of the Fed’s policymaking Federal Open Market Committtee
next year, also stopped short of calling for a near-term resumption of
Q.E. but he too seemed prepared to move if the employment and inflation
outlook does not improve. Like Dudley, he did not seem to think that
further deterioration is needed to justify more accomodation.

“The size of the unemployment gap, combined with the fact that
inflation has been running below the level I consider consistent with
long-term price stability, suggests that it would be desirable to
increase monetary policy accommodation to boost aggregate demand and
achieve our dual mandate,” said Evans after saying the U.S. may already
be in a “liquidity trap.”

The Dudley and Evans comments were similar to those Boston Federal
Reserve Bank President Eric Rosengren, a current FOMC voter, made in a
Wednesday interview with Market News International.

Rosengren said he has “an open mind” approaching the Nov. 2-3 FOMC
meeting but strongly suggested he favors resumption of QE, be it
Treasuries or MBS. He said the FOMC need not necessarily wait for
further deterioration in the economy.

“If unemployment was going to stay at 9.6% and the core (consumer
price index) was going to stay at nine tenths of a percnet for as far as
the eye can see that would not be getting us where we want to go,” said
Rosengren. “So it’s not just moving away from where we are, we need to
see improvements from where we are because wse’re not where we want to
be.”

Cleveland Fed President Sandra Pianalto, another 2010 FOMC voter,
was more noncommittal in a Thursday speech.

“If further policy accommodation is needed to promote price
stability and the continuation of the economic recovery, we have options
available to us,” Pianalto said.

However, she said, “We are in uncharted waters. History does not
provide a complete guide for the unconventional policy tools we are
using, which is why it is important that we continue to examine the
costs and benefits of these tools.”

“If additional accommodation is needed, I want to be sure that the
framework we employ is an effective one,” she continued. “I am confident
that the Federal Reserve can effectively respond to evolving economic
and financial developments.”

But three other Fed presidents who will vote on policy next year
sounded ambivalent at best about wading back into the bond market.

Minneapolis’s Kocherlakota didn’t give his threshold for supporting
QE, but said Wednesday that its impact on both long-term interest rates
and inflation expectations would likely be “muted.”

The FOMC will “have to do a cost/benefit analysis of the tools. The
important thing is clarity,” he said. “We should be clear about what we
want to achieve, what we think is going to happen.”

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** Market News International **

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