* Bullard, Plosser reflect range of opinion on bond-buying
* About half of Fed officials see end to QE this year
* Bernanke said that would not happen until mid-2014
* 6.5 pct jobless rate should 'trigger' tightening -Plosser
* Williams downplays significance of divergent views at Fed
By Jonathan Spicer
JACKSON HOLE, Wyo., July 12 The wide divergence
of opinion within the Federal Reserve over when to wind down its
unprecedented support for the U.S. economy was on full display
on Friday, starkly illustrating Chairman Ben Bernanke's
leadership challenge for the rest of this year.
St. Louis Fed President James Bullard and Charles Plosser,
his counterpart at the Philadelphia Fed, sat on the same panel
at a conference here, but sang quite different tunes on what to
do about the U.S. central bank's massive bond-buying program.
While Bullard and other more dovish policymakers want to
keep buying assets until inflation rises and unemployment drops,
Plosser and the more hawkish of the Fed's 19 policymakers want
to reduce the pace sooner than later.
"It is time to exit from the asset purchase program in a
gradual and predictable manner," Plosser told the 5th Annual
Rocky Mountain Economic Summit.
After delivering his speech and fielding a few questions
from bankers and economists, Bullard told reporters: "I'd like
some kind of reassurance that inflation was moving back toward
target" before reducing the bond buying.
It was yet another clue for investors as they try to predict
when the Fed will reduce the $85 billion in monthly bond
purchases, a policy meant to encourage investing, hiring and
overall U.S. economic growth.
According to minutes of the Fed's June policy meeting,
around half of the 19 policymakers gathered there expected to
end the quantitative easing program (QE) by late this year,
while the other half wanted to keep buying bonds into next year.
That contrasts with the conditional timeline Bernanke
articulated in a news conference after the meeting on June 19,
when he said the Fed's 12-member policy-setting committee
expects to end QE by mid-2014, as long as economic growth
continues as expected.
While the official statement from the 12-member Federal Open
Market Committee made no mention of that timeline, Bernanke said
he was speaking on its behalf. The comments prompted a global
market selloff, from bonds to stocks to emerging-market
currencies, over the following few days.
Markets have since calmed, and Bernanke on Wednesday
reemphasized the Fed's commitment to accommodative policy.
San Francisco Fed President John Williams, speaking in
Vancouver, British Columbia, sought to downplay the importance
of the range of views.
Only a few months ago, Williams himself had called for a
stop to bond-buying by the end of the year.
But inflation has come in lower than he expected, prompting
him to make a "small shift" in his own view, so now he fully"
supports Bernanke's mid-2014 target.
"We are probably going to need to have more accommodation
than I had been thinking a couple months ago because of the
inflation data," he said.
But the gap between his current view and his old view, which
half the Fed officials share, is not a "substantive difference."
"I don't see these differences as being that big," he said.
Lower-than-expected inflation helped convince him to make
that "small shift" in his policy view, Williams said, adding
that exactly when the Fed ends the bond buying program is not as
important as making sure the high unemployment rate comes down
and undesirably low inflation rises back to the Fed's 2 percent
The policy-setting FOMC is made up of more dovish officials
than the broader group of 19. Yet the fact that half, and
possibly more than half, of the broader group expect the
accommodation to end at least six months ahead of Bernanke's
timeline could sow confusion in financial markets.
"The message continues to breed volatility and eye-rolling
criticism of Fed communication efforts," said Eric Green, an
interest rate strategist at TD Securities in New York.
"What we do know is that half of the broader FOMC policy
universe wants to end all asset purchases this year and it is a
bias hard to dismiss, even if many are non-voters this year," he
wrote in a client note.
INFLATION A GROWING CONCERN
While Bullard has a vote on policy this year, Plosser
regains his vote next year. Bullard dissented at the June
meeting due in part to a lack of concern over weak inflation
Inflation as measured by the Personal Consumption
Expenditure (PCE) price index is around 1 percent, below the
Fed's 2-percent goal, despite the bond-buying and
four-and-a-half years of near-zero interest rates.
"If inflation went lower than where it is on a PCE basis
then the (FOMC) would have to re-think its strategy," Bullard
"The simplest thing to do would be to say that we would
stick with the QE program for longer ... until we see inflation
coming back to target," he added.
Plosser, an long-time critic of the bond-buying, told
reporters: "I don't think it has been very effective, I think we
are taking huge risks ... I would just as soon unwind from
Since Bernanke articulated the QE timeline on June 19, Wall
Street economists have increasingly forecast the Fed will reduce
the pace of QE at a meeting scheduled for September. There is
also one set for the end of this month.
Also since June 19, longer-term market-based yields have
risen sharply before more recently shedding some of those gains.
Benchmark 10-year Treasury notes slipped on Friday, with the
yield rising again to 2.59 percent.
WHEN TO TIGHTEN POLICY
Turning to when the Fed should finally raise interest rates,
Plosser argued the central bank should commit to tightening
policy when the unemployment rate falls to a 6.5-percent
"trigger," instead of just using that level as a rough guidepost
for considering a rate rise.
Plosser's proposal, introduced in his speech on Friday, runs
against the grain of most other U.S. monetary policy makers, who
have increasingly stressed that rates could well stay near zero
well after the U.S. jobless rate hits that level.
To clarify its future intentions and to give the economy
even more support, the Fed said in December it would keep rates
that low until unemployment falls to 6.5 percent, as long as
inflation expectations did not rise above 2.5 percent.
Unemployment was 7.6 percent last month.
Plosser said these so-called "thresholds," while an
improvement, still leave too much room for interpretation. The
Fed should "commit to its forward guidance" by treating those
levels as "triggers rather than thresholds," he said.
The "FOMC has offered a variety of changing targets or
signals about future behavior," he told the conference, which
was hosted by the Global Interdependence Center.
"Although the aim was to clarify our policy intentions, I
believe the repeated changes have likely caused more confusion
The proposal may be a long shot, since influential officials
have recently stressed the Fed is in no rush to raise rates.
On Wednesday, Bernanke renewed his message that policy would
remain "highly accommodative" and rates could well stay low even
after the jobless rate falls below the threshold.
"There will not be an automatic increase in interest rates
when unemployment hits 6.5 percent," he said.
On Friday, Bullard said the Fed could even formally lower
that threshold, but added that such a move would require more