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When should the Fed lessen the stimulus?

At central bank, debate shifts to the timing for doing less; jobless rate is key factor

WASHINGTON — The Federal Reserve has left little doubt about its plans for the next few months, and thus little mystery about the statement it will release Wednesday after the latest meeting of its policy making committee. The economy remains weak. The Fed will keep buying bonds to hold down borrowing costs.

Inside the central bank, however, debate is once again shifting from whether the Fed should do more to stimulate the economy to when it should start doing less.

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Proponents of strong action to reduce unemployment won a series of victories last year, culminating in December, when the Fed announced it would hold short-term interest rates near zero at least until the unemployment rate fell below 6.5 percent. The rate was 7.8 percent in December.

To accelerate that process, the Fed also said it would increase its holdings of Treasury securities and mortgage-backed securities by $85 billion each month until it sees clear signs of strength in the job market.

The Fed is expected to affirm both policies on Wednesday. Its chairman, Ben S. Bernanke, said this month that the persistence of high unemployment ‘‘motivates and justifies’’ the efforts.

The looming question is how much longer the asset purchases will continue.

The officials who led the push for stronger action have turned to defending the need to continue asset purchases for as long as possible, while those who opposed the policy are pressing for an early end date.

Eric Rosengren, president of the Federal Reserve Bank of Boston, was among the most outspoken advocates for asset purchases last year. In a speech this month, he said the Fed’s efforts to suppress interest rates were producing clear benefits, increasing sales of homes and cars.

“I consider it imperative that monetary policy continue to actively support the economy at present, since we continue to have an unacceptably high unemployment rate while, at the same time, inflation is undershooting the Federal Reserve’s 2 percent target,’’ said Rosengren, who this year holds a rotating seat on the 12-person Federal Open Market Committee.

Critics of the Fed’s efforts initially warned that the purchases would reduce the central bank’s ability to control inflation. Increasingly, they also have emphasized that the purchases could undermine the stability of financial markets.

Esther George, president of the Federal Reserve Bank of Kansas City, said this month that the Fed’s efforts to push down interest rates were driving up the price of farmland, junk bonds, and other risky investments. George, who holds a vote on the policy making committee this year, said the eventual sale of the Fed’s holdings also could disrupt markets.

“Like others, I am concerned about the high rate of unemployment, but I recognize that monetary policy, by contributing to financial imbalances and instability, can just as easily aggravate unemployment as heal it,’’ she said.

Many economists outside the Fed continue to argue the central bank should be acting even more forcefully, but that view has gained little traction inside the central bank.

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, is the only official who has publicly­ endorsed stronger action.

Kocherlakota said the Fed should announce its intention to keep short-term interest rates near zero until the unemployment rate falls below 5.5 percent, rather 6.5 percent.

The Fed deliberately left the duration of the asset purchase program as an open question, in contrast to the specific interest-rate threshold.

It said only that it wanted to see ‘‘substantial improvement’’ in the labor market, though officials have made it clear they also expect to suspend asset purchases well before the unemployment rate reaches the 6.5 percent line.

Bernanke explained in December that the Fed wanted to retain greater flexibility because asset purchases are a relatively untested strategy.

“We’ll be learning over time about how efficacious they are, about what costs they may carry with them in terms of unintended consequences,’’ he said.

But the discussion already has begun to swing toward informal thresholds.

Rosengren said last year that the Fed should continue the purchases until the jobless rate falls at least below 7.25 percent.

James Bullard, president of the Federal Reserve Bank of St. Louis and another voting member this year, wrote this month that ‘‘there is no simple answer to this question.’’

Then he provided one, telling CNBC he expected the unemployment rate to drop to near 7 percent by year’s end.

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