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Friday, October 01, 2010

Fed's Dudley and Evans support QE2

by Calculated Risk on 10/01/2010 01:50:00 PM

From New York Fed President William Dudley: The Outlook, Policy Choices and Our Mandate

Currently, my assessment is 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 addition, 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.

We have tools that can provide additional stimulus at costs that do not appear to be prohibitive. Thus, I conclude that 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.
And from Chicago Fed President Charles Evans: A Perspective on the Future of U.S. Monetary Policy
The modern economic theory of liquidity traps indicates that the optimal policy response at zero-bound is to lower the real interest rate, almost surely by employing unconventional policy tools. Theory also indicates that, in the absence of such policy stimulus, the factors that generate high risk aversion could very well stifle a meaningful recovery, keep unemployment high and reinforce disinflationary pressures – clearly an undesirable equilibrium.

So, in the coming weeks and months, as I assess the incoming data, update my forecast and deliberate on the best monetary policy approach, I will be pondering two key issues: How much more should monetary policy do to reduce the shortfalls in meeting our dual mandate responsibilities for employment and price stability; and what tools should we use?
Dudley is on the FOMC (NY is a permanent member) and Evans is an alternate member. The Fed presidents are signaling that barring an upside surprise - and the personal income report this morning suggests Q3 GDP will show sluggish growth - QE2 will arrive on November 3rd.