Fed Hints at More Bond Buying in ’13

Photograph by Stephen Yang/Bloomberg

William "Bill" C. Dudley, president of the Federal Reserve Bank of New York.

Written with Caroline Salas Gage

A Federal Reserve policy maker added to hints that the central bank will continue Treasury purchases into 2013 when officials gather for their last meeting of this year.

Federal Reserve Bank of New York President William C. Dudley said today that “unacceptably high” joblessness is a key consideration as he considers whether to back additional asset purchases known as quantitative easing.

“The Fed will promote maximum employment and price stability to the greatest extent our tools permit, and we will stay the course,” Dudley said in a speech in New York.

Right now, Fed policy makers are buying $40 billion in mortgage debt each month to give the housing market a lift and cut the unemployment rate from its current 7.9 percent. They’re also pledging to keep the main interest rate near zero through mid-2015.

The Fed also has been swapping $45 billion of short-term Treasuries a month for longer-term debt in a program called Operation Twist, which is scheduled to expire at the end of this year. While that doesn’t add to the Fed’s balance sheet, economists expect that policy makers will replace it with a program that does.

When policy makers last met on Oct. 23-24, a “number” of officials said they may need to expand the monthly bond purchases, according to the minutes of the gathering.

Jan Hatzius, chief economist at Goldman Sachs Group Inc., said today he expects the Fed will decide to increase the pace of balance sheet expansion from $40 billion a month now to about $85 billion a month when policy makers meet next month.

The central bank will probably buy about $85 billion in bonds per month starting in early 2013, San Francisco Fed President John Williams said in a Nov. 14 speech. Williams, who votes on policy this year and was one of the first policy makers to back open-ended buying, said monthly purchases may continue well into the second half of the year.

The decision rests with the Federal Open Market Committee, a 12-member panel led by Chairman Ben Bernanke. It also includes the six other Washington-based Fed governors and five of the 12 presidents of the regional reserve banks. The FOMC next meets Dec. 11-12.

As president of the New York Fed, which conducts the open market operations that actually implement the monetary policy made by the FOMC, Dudley always has a vote. The other 11 reserve banks share the four remaining votes in a rotation.

Dudley said today he’ll “focus on the labor market outlook, not just its current state” in determining whether to add to the Fed’s stimulus. “Although the economy continues to expand, we must grow faster if we are to put all of our jobless workers and idle businesses back to work,” he said.

 

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