Fed official says more bond purchases may needed

WASHINGTON (AP) - A voting member of the Federal Reserve's policy-making committee on Thursday called for the central bank to consider buying mortgage bonds again as a way to spur economic growth.

Daniel Tarullo, a Fed governor, said Thursday that another round of purchases of mortgage-backed securities by the Fed could help the economy by further lowering interest rates, including mortgage rates.

Such a move would be an aggressive step by the central bank to provide support to the economy and boost the depressed housing market.

"I believe we should move back up toward the top of the list of options the large-scale purchases of additional mortgage-backed securities," Tarullo said in his speech at Columbia University in New York. He noted that was something the FOMC first did in November 2008 and then in greater amounts beginning in March 2009.

But it would almost certainly generate opposition within the Fed. Three members of the central bank's policy-making committee have dissented at recent meetings over less dramatic moves, arguing that the Fed risks triggering inflation.

Tarullo is one of 10 Fed officials who have a vote on the Federal Open Market Committee, the panel of Fed governors and regional bank presidents who meet eight times a year to set interest-rate policies.

The next meeting of the panel is Nov. 1-2. There has been speculation in financial markets that the Fed might go further in its campaign to jump-start an economy that many have feared is in danger of slipping back into a recession.

Tarullo's remarks came after Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview published Thursday in The Wall Street Journal that he believes the Fed should consider purchasing more securities, including mortgage-backed securities.

Minutes of the Fed's Sept. 20-21 meeting released last week showed that at least two members of the FOMC said that the weakening economy might require additional bond purchases.

In the end, the Fed stopped short of expanding its already massive portfolio of investments. Instead, the central bank opted to shift $400 billion of its investments to try to lower long-term interest rates.

That decision followed the Fed's announcement in August that it planned to keep short-term rates at record lows until at least mid-2013, assuming the economy remains weak.

Both the August and September Fed actions were approved on 7-3 votes. The three dissenting votes represented the largest number in nearly two decades and underscored the deep policy split on the board.

Tarullo, Rosengren and Charles Evans, head of the Chicago Federal Reserve Bank, have argued for stronger policy moves, contending that the economy, with unemployment stuck around 9 percent, needs more help.

The three dissenters, Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Philadelphia Fed President Charles Plosser, contend that the central bank has already driven a key interest rate it controls to a record low near zero and purchased massive amounts of securities. They argue that the Fed has done all it can and further action runs the risk of making inflation worse once the economy gains momentum.

In June, the Fed completed a $600 billion bond-buying program, its second round of large-scale Treasury purchases. Supporters said the bond purchases kept rates low and encouraged spending. But critics charged that it weakened the dollar and stoked inflation risks.

Another major round of bond buying would be the most dramatic move the Fed has left in a dwindling list of options.

Tarullo's discussion of further bond purchases came in a speech in which he examined what he said was an urgent crisis in unemployment with 30 million people either officially unemployed, being forced to work part-time or who had dropped out of the job market because they couldn't find work.

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