Fed in wait-and-see mode on extra stimulus

ST. LOUIS Wed Apr 11, 2012 7:17pm EDT

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ST. LOUIS (Reuters) - Comments by two top U.S. Federal Reserve officials on Wednesday suggest the central bank is on hold as it waits to see whether a modest recovery will accelerate despite some stumbles, or whether additional monetary stimulus will be needed.

One Fed official said that gloomy jobs data for March does not signal the U.S. economic recovery has been thrown off course. Another said the bar is high for the central bank to take any further easing steps.

St. Louis Fed President James Bullard said a disappointingly weak job market showing in March does not signal the recovery, which had seemed to be gaining momentum, is off track.

"The report was mediocre but it's just one piece of data in the larger mosaic," Bullard told reporters before his institution's annual Homer Jones lecture. "I don't think it changes the outlook appreciably."

Echoing a sense that Fed officials are reluctant to ease monetary policy further, Atlanta Fed President Dennis Lockhart said that for the central bank to launch another round of monetary stimulus, the fragile recovery would have to deteriorate.

"I'm somewhat reticent to consider another round of quantitative easing at this time," Lockhart told a press briefing on the sidelines of a conference sponsored by his bank at Stone Mountain, Georgia.

"I view it as a policy that would respond more to a fairly dramatic negative change of direction in the economy," said Lockhart, a 2012 voting member of the policy-setting Federal Open Market Committee.

Bullard, who is not a voter, is viewed as a centrist on the spectrum of Fed doves who seek further monetary easing and the hawks who want the central bank to begin planning an exit from ultra-loose policy. Lockhart is seen as shading to the dovish end of the scale.

The Fed's policy setting Federal Open market Committee meets in April but expectations are it will not take new steps then. Economists who predict extra monetary stimulus say the move is unlikely before June.

A Fed report published on Wednesday rounded out a picture of a recovery that continues to press ahead, however, modestly, but that higher fuel prices were a concern.

The Fed's "Beige Book" survey of economic conditions across the country found that the world's largest economy kept growing moderately in the late winter months but rising prices for gasoline and other energy products were beginning to worry producers and consumers across the country.

Fed officials found several hopeful signs for growth, including steady hiring and shortages of skilled workers as well as brisk new-vehicle sales and improving residential real estate markets.

Bullard said he was not dismayed by the sobering March payrolls report because many of the Labor Department's non-farm payrolls reports recently have been revised higher. The government report showed employers adding a meager 120,000 new jobs in March and fueled speculation the Federal Reserve would have to launch another round of monetary easing.

Bullard believes unemployment, which dipped to 8.2 percent last month, will continue to slip down below 8 percent by the end of the year and that economic growth will be around 3 percent.

Market anticipation of the Fed's next move has gyrated from expectation of another bond buying program to anticipation the central bank will take no action and may begin to plan its exit from its ultra-easy stance.

Most major Wall Street firms expect anemic growth in the U.S. jobs market and a struggling economic recovery to force the Fed to launch another monetary stimulus, a Reuters poll found on Monday.

The Fed cut rates to near zero more than three years ago and has bought $2.3 trillion in bonds to boost growth. A program to rebalance its bond holdings to lengthen the average maturity of its holdings -- aimed at pushing down longer-term interest rates -- comes to an end in June.

Bullard said that the end of that program, nicknamed "Operation Twist" after a 1960s era effort to twist down longer-term rates, shouldn't be seen as the beginning of a tightening cycle.

"Markets have it a little wrong with the end of Operation Twist because they're talking about the end of Operation Twist as if it would be the end of easing," he said.

Two other Fed officials who spoke on Wednesday said the financial system needs further retooling as it stabilizes after the 2007-2009 recession.

Money market funds must be thoroughly revamped in order to ensure a stable U.S. financial system, the president of the Federal Reserve Bank of Boston, Eric Rosengren, said at the Atlanta Fed conference.

Speaking in New York, Kansas City Fed President Esther George said it would be important to correct misplaced incentives and to scale back government protections that encourage excessive risk-taking to strengthen the financial system.

George has kept markets guessing as to her views on monetary policy.

(Reporting By Mark Felsenthal; Editing by Chizu Nomiyama and Andrew Hay)

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