By MICHAEL S. DERBY
NEW YORK--With the sting of Friday's dismal June jobs report still smarting, Federal Reserve officials who spoke on Sunday and Monday edged the central bank closer to fresh action to aid economic growth.Only a few weeks after extending until year-end a program that sells short-dated bonds to buy long-dated securities (market participants call this effort Operation Twist), expectations have been rising in recent days that the Fed will have to do even more to respond to a deteriorating economic environment. The next step as many economists see it is for the Fed to again grow its $2.9 trillion balance sheet with more bond buying. The June jobs report, with its very modest job gains and stagnant unemployment rate, was the catalyst for the changing monetary policy outlook.
"We're really right at that edge, if economic data continue to come in below expectations and if our view is that we don't expect to make progress on our mandate, then I would think we need more accommodation," Federal Reserve Bank of San Francisco President John Williams said in remarks in Idaho Monday.
Noting that the Fed is "falling short" on both its inflation and employment mandates, Mr. Williams said the central bank is likely to make "only very limited progress toward these goals over the next year." Because of that, "it is essential that we provide sufficient monetary accommodation to keep our economy moving towards our employment and price stability mandates," the official said. If the Fed does need to ramp up its stimulus activities, "the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities," he said.
Mr. Williams is a voting member of the interest-rate setting Federal Open Market Committee. The effort he was mulling is known as QE3 by most in financial markets. Expectations the Fed will have to employ this tool have risen amid evidence the job growth and falling unemployment that kicked the year off is sputtering. Mr. Williams himself said he expects to see low inflation and an unemployment right around the current level of 8.2% until some time into next year.
Mr. William's evolution is notable because the central banker had backed away from the idea more stimulus would be needed in comments made in the spring. The San Francisco Fed leader, however, has been a pretty consistent in his worry about the outlook. He was joined in his concern by comments made in Bangkok overnight by Chicago Fed President Charles Evans.
Because the U.S. isn't making "clear and steady progress toward stronger growth," Evans said, "I support using our balance sheet to provide additional accommodation."
Mr. Evans, who doesn't currently hold a voting role on the FOMC voting roster, said he supported what the Fed did at the end of June. That said, "I would have preferred an even stronger step, such as the purchase of more mortgage-backed securities," Mr. Evans added. "We need more stimulus one way or another."
Boston Fed President Eric Rosengren, who also spoke in Bangkok, said what the Fed does next with policy is data dependent. In his speech, he worried, much as Mr. Williams and Mr. Evans did, about the risks to the outlook from problems with U.S. government spending and Europe's unresolved financial crisis.
"Were there to be a serious financial shock from Europe," the data suggest "it is quite likely that it would have a large impact on financial stocks and the broader stock market in the United States," Mr. Rosengren said. "Such stock-price declines could impact households and businesses on both sides of the Atlantic, and problems in Europe could potentially cause a more significant retrenchment by European financial institutions operating in the United States," he said.
Tilting against the tide, the Richmond Fed's Jeffrey Lacker took the opposite tack in an appearance on Bloomberg Radio. He suggested the U.S. economy's current unemployment rate may be close to its natural rate and, because of this, he said the Fed may need to start thinking about raising interest rates in late 2013.
The FOMC currently expects interest rates to stay very low until late 2014, and there's some evidence the committee may push this back even further in coming gatherings. Lacker dissented against the recent decision to extend Operation Twist.
--Oranan Paweewun in Bangkok and Edward Welsch in Coeur D'Alene, Idaho contributed to this article.
—(Michael S. Derby, a special writer with Dow Jones Newswires, has covered the Federal Reserve since 2001. He also writes about bond markets and the economy, and can be reached at 212 416 2214 or via email: michael.derby@dowjones.com)
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