Stein sees 'bumps' in markets as Fed gets less precise on policy plan

NEW YORK Tue May 6, 2014 7:00pm EDT

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NEW YORK May 6 (Reuters) - The Federal Reserve should expect more "bumps in the road" as financial markets react to increasingly less precise communications from the U.S. central bank, a top Fed policymaker said on Tuesday.

Fed Governor Jeremy Stein, in remarks prepared for delivery in New York, recalled last year's abrupt run-up in market-wide borrowing costs and warned that even the most deliberate communications from the central bank cannot avoid such reactions as the time to tighten monetary policy approaches.

The Fed has kept its key interest rate near zero since the worst of the financial crisis in 2008, and since then has tried to telegraph how long it will keep them there. While this so-called forward guidance has helped stimulate parts of the economy, including housing, the Fed has made a series of adjustments to its message that have often confused investors.

"As policy eventually normalizes, guidance will necessarily take a different form; it will be both more qualitative as well as less deterministic," Stein, who is stepping down as Fed governor later this month, said in his prepared remarks.

In part because of "levered bets" among big-money investors, he said, "we may have some further bumps in the road as this all plays out."

The Fed rolled out its latest version of forward guidance in March when it said rates will likely stay near zero for a considerable time after it ends its stimulative bond-buying program. It ditched a reference to a 6.5 percent unemployment rate as a threshold for considering a tightening.

The central bank expects to halt its asset purchases later this year and to raise rates some time next year, according to forecasts from its policymakers. The changes will represent a reversal of the most accommodative U.S. monetary policy ever.

To suggest that "good communication alone can engineer a completely smooth exit from a period of extraordinary policy accommodation -- is to create an unrealistic expectation," Stein said.

In the nearer term, though, he said the Fed is in a "very good position" given that the market "almost uniformly" expects policymakers to "continue tapering our purchases in further measured steps over the remainder of this year."

(Reporting by Jonathan Spicer; Editing by Leslie Adler)

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