HOUSTON/MILAN A trio of hawkish regional Federal Reserve officials are calling for the U.S. central bank to stop buying mortgage-backed bonds, citing the recent improvement in the housing market.
Richard Fisher, President of the Dallas Federal Reserve Bank, was the latest to point to the recent pick-up in home values and housing construction as signs the central bank's purchases of mortgage-backed securities are no longer needed.
"We can rightly declare victory on the housing front and (reduce) our purchases, with the aim of eliminating them entirely as the year wears on," Fisher told the National Association for Business Economics on Thursday in Houston. "I believe the efficacy of continued purchases is questionable."
His thinking leaves him in a minority at the central bank. Regional Fed presidents rotate into voting seats on the policy-setting Federal Open Market Committee, while board members, who tend to be more sanguine about the effectiveness of the Fed's bond-buying stimulus, are permanent voters.
That means Chairman Ben Bernanke generally leads the way and he still appears reluctant to take his foot off the accelerator with the recovery still fragile and inflation heading lower.
Speaking in Milan, Philadelphia, Fed President Charles Plosser said the central bank should dial back its asset buying starting next month, given the improving economic backdrop.
"Things are better enough for the Fed to slow the pace of purchasing if we are really serious about the fact that (the purchase program) is scalable," he said.
In a speech late on Wednesday, Richmond Fed President Jeffrey Lacker offered much the same message.
"When you look at housing market conditions, I think you could make the case that we should be getting out of mortgage-backed securities," Lacker told reporters after a speech.
Amid the barrage of hawkishness, the Boston Fed's dovish president, Eric Rosengren, welcomed the brighter signals from housing, but said the central bank's aggressive monetary support remains appropriate.
Fed Board Governor Sarah Bloom Raskin was more non-committal, saying it was premature to judge the impact of the Fed's latest actions to spur growth.
"The U.S. economy has continued to recover from the effects of the financial crisis and deep recession, though at a pace that has been disappointingly slow," she told the National Economists Club.
"The recovery does appear to have picked up steam in some sectors, most notably in housing ... However, federal fiscal policy remains an important source of restraint."
Washington raised taxes in January and initiated sweeping budget cuts in March to bolster its finances, but the fiscal tightening is expected to crimp growth.
For his part, John Williams of the San Francisco Fed said the central bank could begin easing up this summer and end its bond buys late this year. But he signaled he would prefer to begin with Treasuries, not mortgage-backed bonds.
"It will take further gains to convince me that the 'substantial improvement' test for ending our asset purchases has been met," Williams said at a luncheon sponsored by the Portland Business Journal.
Williams omitted, for the first time in months, his view that Fed asset purchases will probably be needed well into the second half of the year, a move he told reporters later reflects his growing confidence in his forecast for continued improvement in the labor market.
Williams believes the Fed's housing-bond purchases have a bigger bang for the buck than Treasury purchases, signaling his support for more mortgage-backed bond purchases, even if the Fed decides to trim the overall program.
INFLATION DIP NOT A WORRY
Lacker and Fisher suggested the recent decline in inflation, which is now running at around half the Fed's 2 percent target, is benign and likely transitory.
The Fed is currently buying $85 billion per month in mortgage and Treasury securities to stimulate investment.
Inflation hawks at the Fed worry the sharp expansion in bank reserves could lead to future inflation, even if there are no signs at all of any imminent price pressures. U.S. consumer prices dropped 0.4 percent on falling gasoline prices, the biggest drop since late 2008 during the disruptive aftermath of the Lehman Brothers collapse.
"These numbers are likely to give pause to both hawks and doves on the Fed and keep the current (stimulus) pace in place until signs of inflation returning to the Fed's long-run 2 percent target emerge," said Michael Hanson, senior U.S. economist at Bank of America-Merrill Lynch.
U.S. economic growth rebounded to an annual rate of 2.5 percent in the first quarter following a dismal end to 2012. Unemployment has come down to 7.5 percent from its crisis peak of 10 percent, but remains high by historical standards.
(Additional reporting by Alister Bull and Ann Saphir; Writing by Pedro Nicolaci da Costa; editing by Neil Stempleman, Andrew Hay and Andre Grenon)