* Rosengren, Powell say Fed policy cuts budget gap
* Mount defense as Fed eyes halt in payments to Treasury
* Fed remittances could dry up starting in 2018
* Bernanke downplayed risk of asset bubbles--report
By Jonathan Spicer and Pedro da Costa
NEW YORK, Feb 22 Two top Federal Reserve
officials offered a fresh defense of the U.S. central bank's
asset-buying program on Friday, arguing that it helps the
nation's fiscal health by boosting the economy.
The comments from Boston Federal Reserve Bank President Eric
Rosengren and Fed Governor Jerome Powell amounted to an effort
to inoculate the central bank against political pressures that
might mount if it faces losses on its massive bond portfolio
when interest rates finally rise.
Both officials pointed to increased economic output and the
related rise in tax revenues as two benefits of the central
bank's policy of buying $85 billion in bonds per month.
"We do well to ... consider these benefits, and the costs of
inaction, when evaluating policy," Rosengren, who is considered
one of the more dovish Fed officials, said at a conference
hosted by the University of Chicago's Booth School of Business.
The Fed has said it would keep purchasing assets until the
outlook for the labor market improved substantially, although
minutes from the central bank's January policy meeting released
on Wednesday showed some officials thought they might have to
stop short of that goal due to risks the policy presents.
Most officials have focused on the possibility of asset
price bubbles and future inflation, or the potential for roiling
markets when the time comes to shrink the Fed's balance sheet,
which has tripled since 2008 to around $3 trillion.
Bloomberg, citing anonymous sources, reported on Friday that
Fed Chairman Ben Bernanke had played down concerns that monetary
policy was fueling asset bubbles at a private meeting with U.S.
bankers earlier this month.
But the prospect of political blowback if the Fed loses
money on its bonds also troubles officials, particularly since
any losses would likely come when the central bank is raising
the interest rate it pays commercial banks to park their excess
reserves at the Fed.
The central bank plans to jack up that rate when it comes
time to withdraw money from the economy to make sure it does not
"We're going to pay interest on reserves to large banks in
the U.S., and to foreign banks, to the tune of tens of billions
of dollars, at a time when we're not going to pay anything back
to the U.S. Treasury," St. Louis Fed President James Bullard
said from the audience at the conference.
"That sounds like a recipe for political problems."
PAYING THE PRICE
The central bank returns portfolio profits to the Treasury
each year and it has never missed a payment before. Last year,
remittances hit a record $89 billion thanks to its bloated
The Congressional Budget Office estimates it will contribute
some $95 billion a year to federal coffers through 2016. But
remittances are expected to hit zero from 2018 through 2020,
before resuming in 2021.
"We are in a period where the attacks on the Federal Reserve
are the worst I have seen," former Fed Governor Frederic Mishkin
said during a panel at the conference. "This issue is going to
come up big time in Congress."
Powell, in his first public remarks since joining the
central bank's board last May, acknowledged the Fed could come
under public and political criticism, but said any losses needed
to be put in a broader context.
"Any temporary losses should be weighed against the expected
social benefits of the increased economic growth generated by
the (bond buying), which would include higher tax revenue from
increased output," he said.
In his remarks Rosengren, who along with Bullard and Powell
backed the Fed's bond buying plan in a vote last month, said the
program helps the nation lower its debt-to-GDP ratio by reducing
the interest rate the government pays bond holders.
It also reduces government spending in areas such as
unemployment insurance because it reduces joblessness, he said.
Bullard, considered an inflation hawk, has expressed caution
about expanding the central bank's balance sheet too far.
On Friday, he acknowledged more voices within the Fed are
pressing to scale back bond buying. "The idea of tapering the
program at some point in the future may be gaining some steam on
the committee," he said on CNBC television.
But he added: "Fed policy is very easy and it's going to
stay easy for a long time."