Fed's Stein says firmly behind latest stimulus

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Published October 11, 2012

| Reuters

U.S. unemployment remains "painfully high" while inflation is not an immediate concern, giving the Federal Reserve plenty of reason to launch a new stimulus last month, a top Fed official said.

Jeremy Stein, in his first keynote speech since becoming a Fed governor in May, said he strongly supported the central bank's decision to embark on a new, open-ended bond buying program.

His comments suggest that despite cries of foul from a handful of hawkish regional Fed bank presidents, Fed Chairman Ben Bernanke had solid backing for the third round of quantitative easing, or QE3, announced in September.

Stein said the plan was needed to boost an economy that was growing too slowly to bring down the nation's unemployment rate, currently at 7.8 percent.

"It appears that the economy is growing at a pace such that, absent policy action, progress on reducing unemployment will likely be slow for some time," Stein told an event at the Brookings Institution. "Given where we are, and what we know, I firmly believe that this decision was the right one."

U.S. economic growth registered a paltry 1.3 percent annual growth rate in the second quarter, and economists polled by Reuters see a still-anemic 1.7 percent clip for the third quarter.

Stein offered a detailed explanation for how he estimates the effect of the new asset purchases, which kick off with $40 billion per month in mortgage-bond buying, will help economic growth.

He estimated a hypothetical $500 billion in Treasury purchases would lower 10-year Treasury yields by about 0.15-0.20 percentage point. Stein added there was a boost to stock prices and corporate bond markets as well.

But he said there was an even deeper impact from the psychological boost to confidence among consumers and businesses.

"(The) overall impact of (asset buys) may be augmented via a signaling or confidence channel," Stein said.

Describing some of the potential costs of unorthodox monetary easing from the Fed, Stein concluded - like the policy-setting Federal Open Market Committee - that the risks are manageable and worth taking. He said the Fed has the tools and the will to raise interest rates if inflation becomes a problem.

(Editing by Neil Stempleman)

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