MADISON, Wis./KANSAS CITY Two top Federal Reserve policymakers expressed discomfort on Thursday with the U.S. central bank's easy monetary policy, suggesting Fed Chairman Ben Bernanke may face more dissent this year.
In remarks that stamped her as a hawk on the Fed's policy-setting committee, Kansas City Federal Reserve President Esther George warned that the Fed's near zero interest-rate policy - aimed at boosting the economy - could spark inflation.
"A prolonged period of zero interest rates may substantially increase the risks of future financial imbalances and hamper attainment of the 2 percent inflation goal in the future," she said in her most extensive remarks in a year on policy.
"Monetary policy, by contributing to financial imbalances and instability, can just as easily aggravate unemployment as heal it," she said.
George this month will cast her first vote on monetary policy since taking the helm at the Kansas City Fed in October 2011.
"The latest remarks from Kansas City Fed's Esther George have cemented the presence of a hawkish dissenter on the FOMC in 2013, with Richmond Fed's Lacker passing along the hawkish torch," said Gennadiy Goldberg, U.S. strategist at TD Securities.
Lacker was the lone dissenter on the Fed's policy-setting panel last year.
St. Louis Fed President James Bullard, who also votes this year on U.S. monetary policy, also warned about the potential for inflation, although he noted that so far inflation is running under the Fed's 2 percent goal.
"It is a very aggressive policy and it is making me a little bit nervous that we are overcommitting to the easy policy," he told reporters after a speech to the Wisconsin Bankers Association. "We are taking risk."
Last month, the Fed voted to keep up asset purchases at an $85 billion monthly pace to lower borrowing costs and spur hiring. It said it would continue this policy, called quantitative easing, until it saw substantial improvement in the labor market outlook.
U.S. central bankers also pledged to hold interest rates near zero until unemployment falls to 6.5 percent, provided inflation does not threaten to rise above 2.5 percent.
As Fed officials mull when to taper or end the asset purchases - some, including Bullard, say that could happen this year - the debate may focus on potential inflation.
GEORGE BEARISH, BULLARD BULLISH
So will the outlook for the economy. On this front, George was decidedly more downbeat than her colleague, saying she expects the U.S. economy to grow just above a 2 percent in 2013, while unemployment falls around another half percentage point.
Bullard sees growth at 3.2 percent this year and next, he said Thursday, and sees the jobless rate dropping to 6.5 percent - the Fed's threshold for rethinking its low-rate policy - by the middle of next year. The U.S. jobless rate in December was 7.8 percent.
George emphasized the risks if the Fed continues to buy bonds at this rate, indicating little appetite for a prolonged Fed commitment to this policy.
"These purchases also have their own set of risks and are not without cost," she said. "At their current level and pace of growth, I believe they almost certainly increase the risk of complicating the (Fed)'s exit strategy."
Fed watchers have not heard much from George since she became a policy maker, but Fed watchers had anticipated she would follow her predecessor Thomas Hoenig in holding hawkish views, and her remarks Thursday did not disappoint.
Though Bullard too warned about the risks of inflation, he sounded more ready to stay the course on policy, for now.
"We've been predicting higher inflation and it really hasn't materialized so far," he said. "I think the way to proceed is to continue to be aggressive in our monetary policy and be cognizant that we could have an inflation problem in the future and that we would be ready to move and contain that if we need to."
(Reporting by Ann Saphir; Editing by David Gregorio)