Fed officials say not yet time to remove stimulus
The U.S. economy still needs support from the Federal Reserve even if growth prospects appear firmer, top Federal Reserve officials said on Friday.
The expansion must become more stable and broad-based before the Fed reverses its current policy, and even more stimulus may be needed if the housing market hampers the rebound, said Boston Fed Bank President Eric Rosengren.
There will be a time when these aggressive actions need to be reversed, but first we need to get the economy on a much more solid footing, said Rosengren, who is considered one of the more dovish members of the Fed, and rotated out of a voting slot in the Fed's policy-setting panel this year.
Daniel Tarullo, a governor of the Fed's Washington-based board, told CNBC he saw no reason to tinker with the central bank's $600 billion bond buying program.
However, Jeffrey Lacker, the hawkish Richmond Fed Bank president who has been skeptical of the Fed's latest round of bond purchases, appeared more keen on reviewing the program.
The provision of further monetary stimulus at this point in the business cycle is not without risks, Lacker told the Risk Management Association's Richmond, Virginia, Chapter.
While the outlook may not have improved enough just yet to warrant adjusting our purchase plan in the near-term, I anticipate earnest reevaluation as economic developments unfold in coming months, he said.
Lacker offered a rather positive outlook for the U.S. economy despite ongoing troubles in housing and a labor market that remains too anemic to generate jobs for the millions of Americans who lost them during a deep recession in 2008-2009.
He said he expects gross domestic product to expand between 3.5 percent and 4 percent this year, a bit more optimistic than Fed Chairman Ben Bernanke, who predicted growth between 3 percent and 4 percent in remarks on Thursday.
But Rosengren was much more guarded. He said that though recent data has been consistent with a somewhat happier new year, Rosengren said the recovery is still weak in the world's biggest economy.
Even with a relatively robust recovery, it will take several years before we attain full employment and an inflation rate close to a long-run expectation of 2 percent, he told the New England Mortgage Expo.
Consumer prices outside food and energy rose just 0.8 percent last year, the Labor Department said on Friday. Meanwhile, unemployment remains elevated at 9.4 percent.
The Fed embarked on the $600 billion round of Treasury securities purchases in November, an unprecedented move that garnered much criticism from those worried it would eventually spark a sharp run-up in inflation.
Lacker is one such skeptic, and he urged policymakers to focus on the level of growth rather than some vague notion of its full potential.
Growth rates ought to be a predominant determinant of the appropriate level of the interest rate, Lacker told reporters after his speech. In almost all the models we have, (interest rates) are closely related to the rate of growth of the economy, not to the level of economic activity relative to some benchmark.
This divergence of view should set the tone for the internal debate at the central bank this year. Most analysts do not expect the Fed to cut its bond-buying program short, but recent improvement in the economic backdrop has prompted some forecasters to begin predicting some type of removal of monetary accommodation later this year.
(Additional reporting by Jonathan Spicer in Mashantucket, Connecticut, and Mark Felsenthal in Washington)
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