Fed officials say stimulus needed if U.S. stays weak

(Reuters) - In the clearest calls yet by Federal Reserve officials to pump more cash into the economy, two Fed policymakers said on Friday that more action would likely be needed unless the outlook improves.

William Dudley, president of the Federal Reserve Bank of New York, described current conditions of high unemployment and low inflation as "unacceptable" while Chicago Federal Reserve Bank President Charles Evans said more easing was "desirable."

Evans, speaking in Rome, framed the debate over further easing by the U.S. central bank as one of "how much" and "how," rather than whether the Fed should take steps in the first place.

But in a reflection of the fundamental differences that still divide policymakers, Dallas Fed Bank chief Richard Fisher said the debate is not yet over.

Fisher, who has said only a shock to the system should spur further action, weighed in strongly against what he termed "the Fed's showing a little leg of inflationary permissiveness."

After a policy meeting last week, the central bank said it was prepared to do more to boost the recovery and lift inflation if necessary.

It has already cut interest rates to near zero and pumped $1.7 trillion into the financial system through purchases of longer-term Treasury securities and mortgage-related debt.

Many analysts expect the Fed to launch a renewed round of bond buying, or quantitative easing, as soon as its next policy meeting on November 2-3.

Weak manufacturing and inflation data on Friday bolstered those expectations and pushed the dollar down to a six-month low against the euro.

"Further action is likely to be warranted unless the economic outlook evolves in such a way that makes me more confident that we will see better outcomes for both employment and inflation before too long," Dudley told a conference in New York.

He said the costs of the tools the Fed has available to ease policy further "do not appear prohibitive."

As head of the most important regional Fed bank, Dudley has a permanent vote on Fed policy. Evans and Fisher will rotate into voting seats on the Fed's policy committee next year.

Dudley and Evans are seen as among the more dovish Fed officials. Fisher is viewed as among the inflation hawks.

While hawks largely captured the debate after a Fed meeting on August 10, officials more inclined toward further easing are now making their voices heard. Boston Fed chief Eric Rosengren told Reuters on Wednesday that further easing would be needed if the outlook didn't improve.

"There appears to be a significant set of FOMC members in favor of further policy stimulus in the near term," Barclays Capital analyst Peter Newland wrote in a note to clients.