SAN DIEGO The Federal Reserve could halt its asset purchases this year if the economy improves and unemployment drops, two top Fed officials said on Friday, a view seconded by most economists at Wall Street's top financial institutions.
Meanwhile, another top Fed official warned the U.S. central bank's aggressive easing plan threatens the Fed's credibility.
St. Louis Fed President James Bullard, a voting member of the Fed's monetary policy panel this year, said a drop in the unemployment rate to 7.1 percent would probably constitute the "substantial improvement" in the labor market that the central bank seeks.
That's the bar for the Fed's policy-setting committee to halt the current round of asset purchases that it began in September.
"If the economy performs well in 2013, the Committee will be in a position to think about going on pause" with the asset buys, Bullard told CNBC TV on a sunny balcony outside of the hotel where thousands of economists were gathered for an annual conference here. "If it doesn't do very well then the balance sheet policy will probably continue into 2014."
The Fed has also promised to keep interest rates at their current near-zero level until unemployment drops to 6.5 percent, as long as inflation does not threaten to rise above 2.5 percent.
U.S. unemployment stood at 7.8 percent last month. While that is down from a year ago, monthly job gains are probably not enough to ratchet down unemployment much more.
Philadelphia Fed Bank President Charles Plosser, who expects unemployment to drop to between 6.8 percent and 7.0 percent by end-2013, said on Friday at the same conference that he hoped the Fed would stop buying bonds before the 6.5 percent threshold, implying he anticipated the asset purchases would halt this year. <ID: L1E9C4778>
Economists at nine of 16 primary dealers -- the large financial institutions that do business directly with the Fed -- said they expect the current Fed program of buying $45 billion per month of Treasuries to end in 2013. The Fed is also buying $40 billion in mortgage-backed securities each month.
Meanwhile, Fed policymakers are increasingly concerned about the impact their monthly purchases of $85-billion in longer-term bonds and mortgage securities are having on financial markets.
Minutes from their December policy meeting showed that "several" top officials expected to slow or stop the so-called quantitative easing program, dubbed QE3, "well before" the end of the year - news that surprised some on Wall Street and prompted a drop in stocks and bonds, and a rise in the dollar.
Jeffrey Lacker, president of the Richmond Fed bank, on Friday held his ground opposing QE3, arguing that continued monetary policy is not the appropriate way to tackle the problem.
"It is unlikely that the Federal Reserve can push real growth rates materially higher than they otherwise would be, on a sustained basis," Lacker, who dissented on all Fed easing moves last year, told a meeting of the Maryland Bankers Association.
"I see an increased risk, given the course the committee has set, that inflation pressures emerge and are not thwarted in a timely way," he said.
EYEING 7.1 PERCENT UNEMPLOYMENT
While Lacker is an outspoken policy hawk, Bullard is more of a centrist who is nonetheless toward the hawkish end of the spectrum of Fed policymakers. The pair were the first top central bank officials to speak publicly since the minutes were unveiled on Thursday.
Bullard said he expects unemployment to "continue to tick down through 2013," adding the Fed could ramp down the asset purchases if the jobless rate drops to 7.1 percent.
"That would be probably substantial improvement and the committee could think about removing accommodation on the balance sheet side of the policy at that point," he said.
After the December meeting, the Fed said it would continue buying bonds until the labor market outlook improves "substantially," which Fed Chairman Ben Bernanke has characterized as a "sustained" decline in the unemployment rate.
With the Fed's key interest rate having remained near zero since late 2008 to encourage economic recovery from the Great Recession, the bond purchases are meant to lower longer-term rates and to encourage investment and hiring in the broader economy.
The U.S. economy expanded a respectable 3.1 percent in the third quarter on an annualized basis, but growth is believed to have slowed sharply to barely above 1.0 percent in the last three months of the year.
Government data released Friday showed the U.S. jobless rate held steady from November to December. Bullard called the December jobs number - a boost of 155,000 in new non-farm jobs - "reasonably good.
Plosser, one of the Fed's most hawkish members, said he believes the United States economy likely suffered a lasting decline in its trend potential growth rate as a result of the severe 2007-2009 U.S. recession.
"Any of you who have looked at the data of the most recent ... recession, it certainly looks like we've had a permanent shock," Charles Plosser, president of the Philadelphia Federal Reserve Bank, told a panel at the annual meeting of the American Economic Association. "The problem is we won't know the answer to that for many years to come."
Fed Vice Chair Janet Yellen, a proponent of aggressive Fed easing, also spoke on Friday, but confined her comments to how regulators are tackling risks to financial stability.
(Additional reporting by Jonathan Spicer, Chris Reese and Herb Lash in New York and Pedro Nicolaci da Costa in Baltimore; Editing by Chizu Nomiyama and David Gregorio)