Fed Again Hints at More Stimulus--Gloomy Prediction For the Economy

The Federal Reserve's second-ranking official offered a gloomy assessment of the economy and fresh new hints that the central bank could be moving toward another attempt to revive the economy through securities purchases.Financial-market conditions have deteriorated since the summer, foreign economies are softening, and the threat of a financial shock from Europe is, "particularly worrisome," Janet Yellen, vice chairwoman of the Fed, said in a speech in Denver. Taken together, she noted, there were "significant downside risks" to the economy.

Fed officials have completed two rounds of securities purchases adding $2.3 trillion of mortgage bonds and Treasury debt to the central bank's securities portfolio. They sought to take bonds out of investors' hands and in the process drive down long-term interest rates, hoping to spur spending and investment. A new round of securities purchases, Ms. Yellen said, might be needed.

Her comments come a day after another Fed official, Daniel Tarullo, a governor on the Fed's board, explicitly called for the central bank to strongly consider new purchases of mortgage-backed securities.Ms. Yellen included a subtle suggestion that mortgage securities could be on her shopping list as well.The Fed already owns a large portfolio of long-term Treasury bonds and doesn't want to distort that market too much, she said, meaning it might need to look elsewhere for its next round of bond buying, if one should be needed."Securities purchases across a wide spectrum of maturities might become appropriate if evolving economic conditions called for significantly greater accommodation," she said.

This is sure to be the next battleground on the Fed's policymaking body, which has been divided over whether to take more steps to boost the economy. In other speeches Friday, two Fed dissenters made new arguments against further credit-easing measures.Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said the central bank has been inconsistent. Inflation picked up this year while unemployment has come down, he noted in a speech in Minneapolis. That calls for less Fed money-pumping.Recent easing moves by the Fed, he said, are "thus inconsistent with the evolution of the economy in 2011."The inconsistency, he added, suggests the Fed has become more tolerant of inflation, weakens its credibility and "could give rise to a damaging increase in inflationary expectations." The Fed is effectively trading off the long-term health of the economy with short-term measures, he said.Ms. Yellen, by contrast, noted that inflation expectations have fallen in recent months and deflation could become a risk.Richard Fisher, president of the Dallas Fed and another recent dissenter, added to the arguments against a new round of central bank easing.In a speech in Dallas he said the most recent effort by the Fed to shift its holdings toward fewer short-term securities and more long-term securities in an effort to bring down long-term interest rates, has "so far been of greater benefit to traders and large monied interests than to job-creating businesses."