Baltimore The Federal Reserve's December move to begin to wind down its massive bond-buying stimulus was the right call in light of U.S. job market gains, and further cuts to the program are likely in the offing, a top Fed official said on Friday.
"I supported this decision because it was consistent with the linkage the (Fed's policy-setting) committee established between the asset purchase program and the outlook for labor market conditions," Jeffrey Lacker, president of the Richmond Fed, said in remarks prepared for delivery to the Maryland Bankers Association. "I expect further reductions in the pace of purchases to be under consideration at upcoming meetings."
The Fed decided last month to trim $10 billion from its $85 billion in monthly bond purchases, after unemployment fell to a five-year low of 7 percent.
The U.S. central bank had said it would continue the program, its third round of bond purchases, until it saw substantial improvement in the job market outlook. Fed Chairman Ben Bernanke signaled in December that the program could be fully shuttered by late 2014.
"Since the program began in late 2012, we've seen a substantial improvement in a variety of indicators of labor market conditions, including the unemployment rate and the level of employment," Lacker said. "So it made sense to initiate the process of bringing the program to a close."
Notably, Lacker did not mention the potential downsides of the program; cumulatively, the Fed's three rounds of bond buying so far have brought the Fed's balance sheet to nearly $4 trillion. In a December speech Lacker voiced concern that a large balance sheet could make an exit from stimulative policy difficult, a comment that was absent in Friday's otherwise largely similar speech.
The outlook for the U.S. economy has brightened in recent weeks with the labor market and factory sector strengthening, and Lacker said the stronger growth could be a harbinger of more gains this year.
"But experience with similar growth spurts in the recent past suggests that it is too soon to make that call," he warned, saying that he expects growth in gross domestic product, which grew at a brisk 3.6 percent annual pace in the third quarter, to come in at about 2 percent this year.
He also forecast inflation to rise back toward the Fed's 2 percent goal in the next year or two.
(Writing by Ann Saphir in San Francisco; Editing by Leslie Adler)