Fed’s ‘Extended Period’ Rate Pledge Criticized by Some on FOMC

March 10 (Bloomberg) -- The Federal Reserve’s pledge to keep interest rates close to zero for an “extended period” has come under criticism from policy makers who say it’s restricting their room to maneuver as the economy recovers.

Kansas City Fed President Thomas Hoenig voted against repeating the statement on Jan. 27 because he wanted to keep “the broadest options possible.” Since then, Dallas Fed President Richard Fisher, James Bullard of St. Louis and the Philadelphia Fed’s Charles Plosser have also expressed reservations.

The Fed presidents have said the phrase, repeated every meeting since March 2009, might reduce the central bank’s flexibility to raise interest rates or mislead investors into believing the Fed has a specific date in mind. Their doubts increase the chances the language will be tweaked when policy makers next meet on March 16, said New York University economist Mark Gertler.

“Some on the committee may be concerned that the ‘extended period’ language creates the perception that the Fed will refrain from raising interest rates well beyond the time that economic conditions begin to justify an increase,” said Gertler, who co-wrote research with Fed Chairman Ben S. Bernanke.

Officials may be “getting ready to take the scissors out,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Evans’ Speech

Chicago Fed President Charles Evans omitted the phrase from a speech yesterday in Arlington, Virginia, instead saying rates would stay low for “some time.” He told reporters afterward that the change didn’t signal doubts about the “extended period” phrase.

Evans said that to him, the “extended period” phrase means three to four FOMC meetings. The FOMC schedules eight meetings a year.

Robert Eisenbeis, former Atlanta Fed research director, said the Fed presidents may not convince the rest of the rate- setting Federal Open Market Committee to alter the wording.

Bernanke has signaled the phrase will be retained in next week’s statement by repeating the pledge Feb. 24-25 in semiannual testimony to Congress, Eisenbeis said.

“The job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce,” said the 56- year-old Fed chief, a Republican who won Senate approval in January for a second four-year term.

‘Exceptionally Low’

The Fed adopted the wording three months after cutting its benchmark interest rate to a record in December 2008, saying “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

In November, the FOMC added that its commitment depends on when the labor market, inflation and price expectations pick up.

The job market has since shown signs of stabilizing. Payroll declines have slowed to an average 27,000 a month from November through February, compared with an average 252,000 from July through October.

The U.S. may add as many as 300,000 jobs this month, the most in four years, David Greenlaw, chief fixed-income economist at Morgan Stanley in New York, said in an interview yesterday.

The Fed’s preferred price index, which excludes food and energy costs, rose 1.4 percent in January from a year earlier, below the long-run range of 1.7 percent to 2 percent policy makers want for total inflation. “Most indicators suggest that inflation likely will be subdued for some time,” Bernanke said last month.

Market Rates

Two-year Treasury notes yielded 0.87 percent yesterday, compared with 4.67 percent three years ago. The yield on 10-year Treasuries was 3.7 percent, down from 4.59 percent in March 2007.

Bullard, 49, told reporters last week he was “a little less patient” with repeating “extended period,” though he didn’t plan to dissent. He said the phrase may appear to lock in a time frame for action, whereas the FOMC plans to react to economic conditions as they develop.

“I would hope we would get the committee to think about some different language that would convey the state-contingency that I would like to convey, and I think most people on the committee would like to convey,” he said March 4 in St. Cloud, Minnesota.

Plosser, 61, said Feb. 17 that he had “some sympathy” for Hoenig’s dissent. “That forward guidance has gotten us in a box,” he told reporters in Philadelphia.

Fisher, 60, said Feb. 10 in Dallas that “I have never been comfortable with that language.”

Voting Members

Hoenig and Bullard vote on FOMC decisions this year. The other presidents with a 2010 vote are Cleveland’s Sandra Pianalto and Boston’s Eric Rosengren. New York Fed President William Dudley has a permanent vote, as do the Fed’s Washington- based governors.

The debate echoes discussions in 2003 and 2004, when officials cut the benchmark federal funds rate to 1 percent and said low borrowing costs were warranted for a “considerable period.”

An informal tally by then-Chairman Alan Greenspan at the August 2003 meeting showed seven of 18 policy makers objected to the phrase. It was jettisoned the following January, when the FOMC said it “can be patient in removing its policy accommodation.”

The Fed will provide transcripts of the 2004 meetings in coming months, based on historical release dates.

“The longer you use the phrase, the more it hardens and the more drama is associated with changing” it, said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington who helped write the FOMC statements as the Fed’s monetary-affairs director from 2001 to 2007.