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Fed officials clash on view of economy

By Ann Saphir

CHICAGO (Reuters) - The gap between the Federal Reserve's dovish core and its hawkish wing was on display on Thursday as a top Fed official said the economy is in better shape even as Fed Chairman Ben Bernanke focused on a source of weakness.

While growing "slower than we would like," the U.S. economy is expanding fast enough that it does not need further help from the central bank, Dallas Fed President Richard Fisher told Fox Business Network.

"We will not support further quantitative easing under these circumstances because there's a lot of money lying on the sidelines, lying fallow," he said, according to a transcript provided by the network. "We don't need any more monetary morphine."

Bernanke, by contrast, sounded more cautious, saying U.S. consumer spending is still too weak to ensure a healthy pace of economic growth.

"Right now, in terms of debt and consumption, we're still way low relative to the pattern before the crisis," Bernanke told students in the second of two lectures at The George Washington University. "We lack a source of demand to keep the economy growing."

Fisher is in the minority at the Fed, which last week reiterated its expectation that it will need to keep short-term interest rates near zero through late 2014 to help a lackluster recovery.

But his vocal opposition to further easing points to the challenges Bernanke faces as he seeks consensus on future policy in the face of subpar growth and high unemployment. While Fisher does not have a policy vote this year, he participates in the Fed's regular policy-setting meetings.

In response to the deepest recession in generations, the Fed, under Bernanke's leadership, slashed short-term borrowing costs to zero and promised to leave them there until at least late 2014. The central bank has also sharply expanded its balance sheet through the purchase of some $2.3 trillion in Treasury bonds and mortgage-backed debt.

Although Bernanke has been highly visible this week, jumping between congressional testimonies and his lectures to students, he has not shed additional light on what investors are primarily concerned with - the prospect for further monetary easing.

Analysts now see a third round of bond purchases or quantitative easing as less likely given recent improvement in the economic backdrop, especially in the job market.

Still, Fed officials have made clear they still see the 8.3 percent unemployment rate as too high for comfort, and the risk of contagion from Europe's financial crisis, while smaller, has not completely abated.

The U.S. economy grew 3 percent in the fourth quarter of 2011 but that rate was seen slowing to just under 2 percent in the first three months of this year.

Among analysts and investors, however, expanding U.S. manufacturing and improving labor and housing markets in recent months have lifted hopes for recovery.

Traders have reacted by betting the Fed will start raising rates as soon as July 2013.

Fisher said he is not worried about inflation, which he expects to come down to around the Fed's 2 percent target.

"The real problem in our country is job creation and prosperity," he said. "And we need to get better fiscal policy to complement what we at the Fed have done, because it's not working as effectively as it should."

Separately, one of the Fed's most dovish policymakers offered an analysis of the central bank's verbal clues on the future path of interest rates, concluding they are effective at lowering borrowing costs.

Based on data going back to the mid-1990s, Charles Evans, president of the Chicago Fed, and three other economists, found that markets do indeed listen when the Fed speaks, according to the research, presented at a Brookings Institution conference on Thursday.

The paper from Evans lends support to the Fed's decision earlier this year to begin publishing policymakers' own forecasts for the path of rates, and to clearly state that the Federal Open Market Committee expects rates to remain near zero until at least late 2014.

"It seems possible for the FOMC to change longer term interest rates out of its control by promising to persistently lower the shorter term rates within its control," the paper says.

(Reporting by Ann Saphir and Pedro Nicolaci da Costa; Editing by Andrew Hay)

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