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 Boston Fed President Eric Rosengren, who voted against the Fed's
decision last month to reduce its monthly bond buying by $10
billion, told Reuters the central bank should not take any "dramatic
steps" to wind down asset purchases.
"I'm comfortable with the current approach that it looks like we're
going to be following through on," he said after giving a speech to
an economic forum in Hartford.
San Francisco Fed President John Williams, speaking in Phoenix,
Ariz., said the central bank was likely to continue to cut its asset
purchase program at a "steady, measured" pace in coming meetings.
The comments may reinforce expectations that the so-called
quantitative easing program, or QE, is on track to be wound down and
shelved by year end with few surprises along the way.
Last month, the Fed reduced to $75 billion from $85 billion the
amount of bonds it buys each month, and Fed Chairman Ben Bernanke
said the stimulus program would likely be wound down throughout this
year as the U.S. economy improves.
The Fed has been purchasing the assets in an aggressive effort to
spur investment and hiring in the protracted wake of the Great
Recession.
Rosengren, who repeated on Tuesday he would have preferred to delay
the policy change, appeared to be getting in line with what Bernanke
called a "measured" removal of what amounts to the biggest monetary
policy experiment ever.
"Roughly a $10 billion at each FOMC, if we were to gradually reduce
purchases, I think that would be appropriate," Rosengren said of the
policy-setting Federal Open Market Committee meetings. "I wouldn't
want to take any dramatic steps at this stage because I don't think
the economy warrants it."
The FOMC next meets January 28-29, the last meeting before Fed Vice
Chair Janet Yellen succeeds Bernanke as chair. Rosengren loses his
vote on policy this year under a rotating system.
The Fed cited a stronger job market in its December 19 decision to
reduce bond purchases, a move that surprised many investors.
Unemployment hit a five-year low of 7 percent in November. Recent
growth in jobs, consumer spending, manufacturing and housing, as
well as a fresh budget deal in Congress, has meanwhile brightened
U.S. prospects going into 2014.
Still, Rosengren warned the economy remains vulnerable the longer
inflation remains too low, and said policy stimulus should be
removed "only gradually."
The Fed "continues to miss both elements of its dual mandate from
Congress — inflation and employment — by fairly large margins,"
Rosengren told a Connecticut business and industry association.
In his speech, Rosengren he warned that the low level of inflation
left the nation exposed to the risk of a debilitating deflation,
even though he also said he expected the economy to grow about 3
percent this year.
"At very low inflation rates, a sizable negative shock to the
economy can result in negative inflation — deflation — which can
become entrenched in expectations, leading to a protracted period of
deflation," he told a Connecticut business and industry association.
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A core price index closely followed by the Fed was up only 1.1
percent in the 12 months through November, well below the Fed's 2
percent target.
Williams sounded more upbeat. He not only predicted a pickup in
growth this year, but said he believes inflation has probably
bottomed out. Still, like Rosengren, he said that excessively high
unemployment and too-low inflation call for continued monetary
accommodation, and said the Fed will keep rates low for the
"foreseeable future."
"I want to stress that scaling back on asset purchases is not a
retreat from accommodative monetary policy," said Williams, whose
views are seen as closely aligned to his former boss, incoming Fed
Chair Janet Yellen. "We're starting to ease off the gas, but we're
nowhere near hitting the brakes yet."
Williams told reporters the December taper was to him a "clear"
decision given the improvements in the economy and the easing of
fiscal headwinds.
The Fed has tied further withdrawal of stimulus to continued
economic progress. Williams said he would need to see growth deviate
"significantly" from expectations to either halt the tapering or
ramp it up.
Rosengren, in comments to Reuters, was more specific.
"To halt it, certainly if we stop seeing progress in the labor
markets ... and we were to start seeing the unemployment rate go up — that would be certainly a source of concern and a reason to stop
it," he said.
On the other hand, "it would take some fairly strong, unexpected
growth, and inflation much more quickly than I'm expecting back
towards 2 percent, to make me want to remove accommodation more
quickly," Rosengren said. "I don't expect that to happen," he added.
Besides the purchases of Treasuries and mortgage bonds, the Fed has
kept interest rates near zero since late 2008 and has said it will
likely keep them there "well past the time" unemployment falls below
6.5 percent.
Asked about this telegraphing of policy intentions, Rosengren said
he would have been comfortable lowering the 6.5-percent threshold.
But he acknowledged the communication challenges that would bring.
Fed Vice Chair Yellen, who won final approval Monday from the U.S.
Senate to succeed Ben Bernanke when his term ends this month, has
made communications and transparency a priority.
(Editing by Chizu Nomiyama)
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