Fed's Dudley says more economic aid likely

The Federal Reserve is likely to take additional action to rejuvenate the economy and lower unemployment, an influential member of the central bank's policymaking group said Friday.

William Dudley, president of the Federal Reserve Bank of New York, said the pace of economic growth has been disappointing. And he worries that if the economy doesn't strengthen, the risk of an outbreak of deflation rises. Deflation is a dangerous and widespread decline in goods and services, wages and in the values of homes and stocks.

The Fed is considering buying more government debt to force down rates on mortgages and other loans to entice Americans to spend more. Doing so would bolster the economy.

In a speech in New York, Dudley laid out his strongest case for the Fed to take more action. Dudley's remarks carry weight because he is a permanent voting member of Fed's main policymaking group. The group's power to influence interest rates affects Americans' pocketbooks and shapes overall national economic activity.

"We have tools that can provide additional stimulus at costs that do not appear to be prohibitive," Dudley said. "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," he added.

Charles Evans, president of the Federal Reserve Bank of Chicago, also said on Friday that more action by the Fed would be "desirable." Evans said he's still assessing the best way to provide more aid as well as how much. Evans, who will become a voting member of the Fed's policy group next year, made the comments in a speech delivered in Rome.

The remarks by Dudley and Evans come amid disagreements among Fed officials about how to pump up the economy. Some Fed officials have clashed over how much help would come from buying more government debt, the Fed's next likely step. Others are skeptical about providing any extra help.

Despite the divisions, many economists predict the Fed will move ahead and buy more government securities — perhaps as soon as its next meeting on Nov. 2-3. The Fed is weighing that option, known as quantitative easing, because its traditional interest-rate lever to help the economy is already at a record low near zero and can't be cut further.

A $500 billion purchase of securities would provide about as much stimulus as a half-point to three-quarters point cut in the Fed's main interest-rate lever, called the federal funds rate, Dudley estimated.

Dudley downplayed concerns that even lower interest rates might fail to spur Americans to buy more.

"This is too dark a view," he said.

He argued that lower rates would help bolster the values of homes and stocks, which would support Americans' wealth and could make them feel better about spending more. Moreover, lower rates could lead more people to refinance their homes, which would leave them cash to spend on other things, he said.

But Richard Fisher, president of the Federal Reserve Bank of Dallas, was skeptical.

"Further quantitative easing might be pushing on a string," he said in a speech in Canada. "In the worst case, it could flood the engine of the economy with gas that might later ignite inflation." Fisher will become a voting of the policymaking group next year.

Meanwhile, James Bullard, president of the Federal Reserve Bank of St. Louis and a voting member of the Fed's main policymaking group, has suggested that the Fed initially buy a moderate amount of government bonds — perhaps in the range of $100 billion or less. After that, the Fed would review the economic climate at each meeting and decide whether it needs to buy more government bonds to bolster the economy.

That would allow the Fed to avoid making the kind of upfront commitment to buy government debt on a large scale in the trillion-dollar range. It also could ease concerns among some Fed officials about carrying out the type of large-scale interventions seen during the recession. The Fed ended up buying a total of roughly $1.7 trillion of mortgage securities and debt, as well as government bonds, during the recession.

Evans said he expects economic growth in the second half of this year will be about as weak as in the spring. Growth slowed to just a 1.7 percent pace in the April-June quarter, the slowest in nearly a year. That means unemployment, now at 9.6 percent, is likely to rise in the months ahead.

Even though Evans and Fisher aren't voting members this year, they participate in the Fed's meetings and policy debates.