Bernanke, lawmakers talk fiscal cliff scenarios (by Greg Robb)

WASHINGTON (MarketWatch) - Federal Reserve Board Chairman Ben Bernanke warned members of the Senate Finance Committee that the so-called fiscal cliff could damage the U.S. economy, Senators who attended the closed-door meeting said Wednesday. Higher taxes and deep cuts in federal spending are slated to take effect Jan. 1 unless Democrats and Republicans agree to change the current law. Bernanke said the fiscal cliff "would be a severe, negative shock to the economy," said Sen. Chuck Grassley, a Republican from Iowa, in a statement. Sen. Max Baucus, the Democrat from Montana and chairman of the Finance panel, said Bernanke and the committee talked about "what happens under different scenarios," according to The Hill newspaper. The Fed chairman urged the Committee to put the U.S. on a firmer fiscal footing, said Sen. Kent Conrad, a Democrat of North Dakota.

Bullard says Fed policy 'broadly appropriate': FT (by Barbara Kollmeyer)

MADRID (MarketWatch) -- Current U.S. monetary policy "remains broadly appropriate," wrote the president of the Federal Reserve Bank of St Louis, James Bullard, in the Financial Times on Thursday. "The Fed's recent adoption of a flexible form of quantitative easing should enable it to continue to pursue this approach through management of its balance sheet as new economic information arrives," wrote Bullard. Earlier in the week, he said supporters of a third round of quantitative easing were relying too much on the central bank's ability to bring down the jobless level. In the opinion column he addressed the "dual mandate" role of the Fed -- keeping unemployment low and inflation stable. Under an "appropriate monetary policy," he said, the Fed is likely to be missing on both sides of that mandate as the economy takes time, which he said could be many years, to return to normal.

Fed's QE3 plan built on JAPAN lessons: Rosengren (by Greg Robb)

WASHINGTON (MarketWatch) - The aggressive nature of the Federal Reserve's third round of asset purchases, or QE3, was designed so that the U.S. does not suffer a prolonged economic stagnation like Japan, said Eric Rosengren, the president of the Boston Fed Bank on Thursday. Japan's two decades of subdued growth "is a sobering real-world reminder of why forceful and timely action is appropriate," Rosengren said in a breakfast speech to a business group in Quincy, Ma. Rosengren was one of the first Fed officials to call for QE3 this summer. "In my view, these policies are essential to achieving a strong sustainable recovery that is resilient, despite inevitable disruptions," he said. Even with the programs, and assuming no further negative shocks from Europe or domestically, "it will be several years before we are likely to return to full employment," Rosengren said.

Fed's Lockhart: Inflation risk from QE3 'remote' (by Greg Robb)

WASHINGTON (MarketWatch) - There is only a "remote" risk of an outbreak of inflation as a result of the Federal Reserve's third round of asset purchases, said Dennis Lockhart, the president of the Atlanta Federal Reserve Bank on Thursday. Lockhart voted in favor of QE3 last week. His views are seen as close to the center of Fed policymakers. After a speech in Kansas City, Lockhart told reporters that he decided more asset purchases would help the economy, according to Reuters. He said the risks associated with the purchases were not severe and were manageable.

Fed's Pianalto says QE3 should support housing (by Greg Robb)

WASHINGTON (MarketWatch) - The Federal Reserve's third round of asset purchases, known colloquially as QE3, should put some downward pressure on home-mortgage rates and help the housing sector recover, Sandra Pianalto, president of the Cleveland Federal Reserve Bank, said Thursday. "These lower rates should provide further support for the housing sector by encouraging home purchases and refinancing," she remarked in a speech at Miami University in Oxford, Ohio. Pianalto warned that the Fed's $40 billion purchases of mortgage-backed securities per month may yield "somewhat smaller interest-rate declines," and may not stimulate economic activity as much as the two previous asset-purchase programs. But the program might help bolster consumer confidence if it can help stabilize housing prices, she said.

Fed's Bullard: U.S. fits slow post-crisis pattern (by Greg Robb)

WASHINGTON (MarketWatch) -- The U.S. economy seems to be experiencing the slower-than-normal growth predicted by two prominent economists who have looked at 800 years of financial history, James Bullard, president of the St. Louis Federal Reserve Bank, said Thursday. In their book, "This Time is Different," economists Carmen Reinhart and Kenneth Rogoff warned that economies grow more slowly in the wake of financial crises. "A version of this seems to have happened in the U.S.," Bullard remarked in a speech at Notre Dame University. He said U.S. growth and inflation are "about on target if properly adjusted for the Reinhart-Rogoff effect." If policy makers don't adjust for this, it could be "an unmitigated disaster," he added. Bullard has come out against the Fed's third round of asset purchases, colloquially known as QE3. He suggested that the Fed could be repeating a mistake of the early 1970s, when the central bank did not recognize a productivity slowdown