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Fed trio move closer to QE3

WASHINGTON (MarketWatch) -- A trio of influential Federal Reserve officials on Monday sounded the alarm on the economy, and suggested that the central bank is close to starting another round of asset purchases.

In a speech to a bankers' convention in Idaho, John Williams, the president of the San Francisco Federal Reserve Bank, said progress on bringing down the unemployment rate is now running at a "snail's pace," and perhaps even stalled.

He said the Fed is on the "edge" of being forced from the sideline to once again prop up growth.

Fed Chairman Ben Bernanke told reporters last month that the Fed was watching the labor market closely to decide whether or not to undertake more easing steps.

Earlier on Monday, two of the most dovish Fed officials speaking at a conference in Bangkok, also expressed concern that the economy was struggling and said they would support more quantitative easing.

Boston Fed President Eric Rosengren said more quantitative easing is appropriate as labor market growth has slowed fairly noticeably and the global economy is vulnerable to financial shocks.

The U.S. created just 80,000 jobs in June, further evidence that the economy has hit another rough patch. The unemployment rate was See complete MarketWatch coverage.

The unemployment rate was unchanged at 8.2%.

Chicago Fed president Charles Evans repeated his call for aggressive action to counter the weak outlook.

"I support using our balance sheet to provide additional accommodation," Evans said.

On the other hand, Richmond Fed president Jeffrey Lacker, one of the most hawkish Fed officials, downplayed the recent soft data.

"We are just in a situation where growth is going to fluctuate between somewhat satisfactory and disappointing," Lacker said, in an interview with Bloomberg Radio.

Lacker, who voted against Fed efforts to stimulate the economy last month, said there was little the Fed could do about the unemployment rate because structural factors were keeping it elevated.

"Employment is close to maximum right now" given "the constellation of impediments and challenges this economy has had over the years," Lacker said.

In his remarks in Idaho, Williams said the Fed was facing a "sobering set of circumstances" that requires "extraordinary vigilance" from policymakers.

Williams, who is a voting member of the Fed's interest-rate setting committee this year, is considered closer to the center of Fed policy thought and so his move toward easing is significant.

Williams said he has a "subdued outlook" for the economy but even that is threatened by the ongoing crisis in Europe.

The danger remains that the "slow-motion" responses of European governments will be outrun by uncertainty and fear, he said.

Williams trimmed his growth forecasts for the next 18 months and said global financial market strains raise the possibility that growth and progress on employment will be even slower than expected.

"In these circumstances, it is essential we provide sufficient monetary accommodation to keep our economy moving towards our employment and price stability mandates," he said.

If further easing action is required, "the most effective tool" would be another round of asset purchases, including agency mortgage-backed securities.

Williams told reporters he would want the next round of quantitative easing to be open-ended.

Williams said the Fed's decision to extend Operation Twist until the end of the year is expected to only have "a relatively modest impact" on the economy.

Williams said that the trend in U.S. job growth is probably lower than 150,000 jobs per month.

This pace of job gains is just a bit above the growth of the labor force.

"So I expect that the unemployment rate will remain at or above 8% until the second half of 2013," he said.

Williams said that he expects the inflation rate to come in below the Fed's 2% target in 2012 and 2013.

"We are falling short on both our employment and price stability mandates and I expect will make only very limited progress toward these goals over the next year," he said.