* Dallas Fed's Fisher: May need to "taper" off bond buying
* St Louis Fed's Bullard: Purchases could be cut "somewhat"
* San Francisco Fed's William supports continued purchases
By Jonathan Spicer and Ann Saphir
NEW YORK/DALLAS Feb 21 Two top Federal Reserve
officials on Thursday signaled support for scaling back the U.S.
central bank's aggressive bond-buying program, adding fuel to a
contentious debate over how long the Fed should continue its
extraordinary measures to support the economy.
But even as James Bullard, president of the St. Louis
Federal Reserve Bank, and Richard Fisher, president of the
Dallas Fed, both considered inflation hawks, lent support to the
argument favoring a move to tighten monetary policy, another
policymaker known for his dovish stance said the Fed should keep
buying bonds until well into the second half of this year.
The latest remarks from Fed officials amounted to a doubling
down on their previous comments, underlining long-held divisions
among the central bank's 19 policymakers. They come as investors
grow increasingly sensitive to signs of policy change, and as
data on Thursday indicated the U.S. economy continues to
struggle to regain strength.
Financial markets are abuzz with speculation on just how
long the central bank will continue its program of buying bonds
at a monthly pace of $85 billion. The Fed's asset purchases have
resulted in a flood of liquidity that has fed a bid for riskier
assets amid a climate of ultra-low interest rates.
The benchmark Standard & Poor's 500 index
has gained more than 5.0 percent already this year and is
trading near five-year highs.
Prices of U.S. Treasury debt have also been supported by the
bond purchases, though the perceived safety of the government
bonds has supported prices even as doubts have surfaced over how
long the bond purchases might continue.
The Fed at its last policy meeting, on Jan. 29-30, opted to
maintain the pace of bond purchases until the labor market
outlook improved substantially.
But the release of the minutes of that meeting highlighted
the rift among Fed officials over the risks of high inflation
versus the need for continued support of a fragile economic
"A number of participants stated that an ongoing evaluation
of the efficacy, costs, and risks of asset purchases might well
lead the (policy-setting) committee to taper or end its
purchases before it judged that a substantial improvement in the
outlook for the labor market had occurred," the minutes said.
HAWKS STAND PAT
Fisher, who is not a voting member of the Fed's
policy-setting committee this year, in an interview with Reuters
on Thursday said the Fed may need to "taper" off its bond-buying
program rather than halt it outright.
"You don't go from wild turkey to cold turkey, you have
tapering in between," Fisher told Reuters. "If the economy
continues to improve, I personally would expect that to be
sometime this year."
Fisher acknowledged current slow U.S. growth but said, "We
should begin to taper this thing off as unemployment improves
and as long as we don't see inflation rear its ugly head."
"I don't care whether you're a hawk or a dove, no one on the
committee wants to do it radically. What you want to do is do it
sensibly," he added.
James Bullard, of the St. Louis Fed, on Thursday also
supported a gradual pullback.
"Substantial labor market improvement" does not arrive
suddenly, Bullard said in a lecture at New York University.
"This suggests that as labor markets improve somewhat, the pace
of asset purchases could be reduced somewhat, but not ended
Bullard, who votes on policy this year, acknowledged that
the size of the Fed's balance sheet, now at more than $3
trillion, may complicate or prevent a "graceful" exit from the
very accommodative policies it has adopted to boost the U.S.
recovery from the worst recession in decades.
"These are untested policies. It's not clear how it will
end," he said. "So because there's uncertainty about that we'd
rather not do more than we have to."
Talking to reporters, he repeated a proposal he floated last
week that would regularly adjust the value of bond purchases to
changes in the unemployment rate. "To me, that would be a better
policy. You'd be more state contingent," he said.
The U.S. stock market has seen an abrupt reversal that looks
set to end a seven-week rally after the release of the Fed
minutes drove speculation about the bond purchases potentially
ending sooner than many investors have expected. The S&P on
Thursday dropped 0.68 percent a day after registering a 1.24
FED MISSING ON BOTH GOALS
The Fed is buying $45 billion in Treasuries and $40 billion
in mortgage-backed securities per month in its third round of
quantitative easing. It has also pledged to keep interest rates
near zero until the unemployment rate drops to 6.5 percent, as
long as inflation expectations remain contained.
The jobless rate is now at 7.9 percent.
However, John Williams, president of the San Francisco Fed
and one of the central bank's more dovish members, highlighted
the stubbornly high jobless rate as he called for continued bond
purchases on Thursday.
"The Fed's dual mandate from Congress is to pursue maximum
employment and price stability. We are missing on both of these
goals," Williams said in an address at The Forecasters Club in
New York. "Unemployment is far too high and inflation is too
As a result, Williams, who is not a voting member of the
Fed's policy-setting committee this year, said the U.S. economy
needs "powerful and continuing" policy stimulus.
"I anticipate that purchases of mortgage-backed securities
and longer-term Treasury securities will be needed well into the
second half of this year."
And he told reporters after his speech that there should not
be significant tapering of bond buying "unless you were seeing
the significant improvement in the outlook for the labor
The latest remarks came as data on Thursday cast some doubt
on the strength of U.S. economic growth. News on the
manufacturing sector, which has supported the economy's recovery
from the 2007-09 recession, was downbeat.
A report from the Philadelphia Federal Reserve Bank showed
that factory activity in the U.S. mid-Atlantic region
unexpectedly contracted in February for the second month in a
row, hitting an eight-month low. The report is seen as one of
the first monthly indicators of the health of U.S. manufacturing
and was in contrast to data last week that showed activity in
New York State rebounded.
Another report from financial data firm Markit that tries to
gauge overall national factory activity showed manufacturing
growth slowed in February but remained near a nine-month peak.
The Labor Department reported that new claims for jobless
benefits rose by 20,000 last week to a seasonally adjusted
And another Labor Department report on Thursday showed
consumer prices were flat for a second straight month in
January. In the 12 months through January, consumer prices rose
1.6 percent, the smallest gain since July, suggesting there was
little inflation pressure.
Williams on Thursday did not dwell on the risks associated
with the Fed's bond purchases. But he did play down the concern
this massive expansion would fan inflation.
"I want to assure you that in no way have we relaxed our
commitment to our price stability mandate. We constantly monitor
inflation trends and inflation expectations. And we will not
hesitate to act if necessary," he said.