* Selloff not yet cause for concern -Kocherlakota, Fisher
* U.S. stocks down again after last week's sharp drop, bonds
* Fed must consider financial instability in policy -Dudley
By Jonathan Spicer
June 24 Less than a week after the U.S. Federal
Reserve set off a cascade of selling in global markets, two of
its top officials downplayed the notion of an imminent end to
monetary stimulus and said on Monday the market reaction was not
yet cause for concern.
The Fed is center stage for investors after Chairman Ben
Bernanke last week said the central bank expected to reduce its
bond-buying later this year, and to halt the stimulus program
altogether by mid-2014 if the economy improves as forecast.
Bernanke's road map to the end of the Fed's third round of
quantitative easing, or QE3, left ample room for adjustment and
interpretation - and his colleagues provided a bit of their own
on Monday, appearing to try to assuage fears in the marketplace.
Minneapolis Fed President Narayana Kocherlakota said
investors, who drove stock and bond prices lower in the last few
days, were wrong to view the central bank as having become more
keen to tighten policy than it was before last week's policy
"I thought there was a sense out there ... that the
committee had taken more of a hawkish turn in terms of thinking
about policy... I thought that was a misperception that should
be clarified," Kocherlakota told reporters on a conference call.
Perhaps the most dovish of the Fed's 19 policymakers, he
highlighted underlying messages in both Bernanke's comments and
the Fed's policy statement that were "pretty accommodative,"
including the central bank's expectation that it will not sell
off its mortgage bonds in the years ahead.
The resulting rise in longer-term bond yields is "not a
cause for concern" so far, Kocherlakota added. "But obviously,
if these higher yields were to harden over a longer period of
time, that would be restrictive to economic conditions."
The yield on the benchmark 10-year U.S. Treasury bond
eased slightly on Monday after flirting with a
nearly two-year high, having posted last week its biggest weekly
jump in a decade.
The S&P 500 stock index has fallen 5 percent over the
last four sessions as investors consider how less Fed
accommodation and a cash squeeze in China could hurt the U.S.
If the strong selloff continues, there is the risk that
tighter financial conditions could choke off the slow U.S.
economic recovery that is showing signs of durability and even
acceleration this year.
Richard Fisher, the hawkish head of the Dallas Fed, said of
the market reaction that the "big money" investors appear
cautious after a 30-year bull market in bonds, adding the
strength of the U.S. dollar reflects confidence in the economy.
In a speech in London, Fisher strongly backed Bernanke's
timetable for QE3, repeating the unprecedented stimulus should
be slowly removed. He added that the Fed's ultimate "exit
strategy" is still a ways out in the future.
"Even if we reach a situation this year where we dial back
(stimulus), we will still be running an accommodative policy,"
he said. In a favorite line, Fisher repeated: "I'm not in favor
of going from wild turkey to cold turkey overnight."
As it stands, the Fed is buying $85 billion in Treasury
paper and mortgage-backed securities each month to stimulate
investment, hiring and economic growth.
Since Bernanke's comments on Wednesday, financial markets
have pulled forward the date when they expect the Fed to start
raising interest rates, currently near zero, to around September
2014, even though a majority of Fed policymakers do not expect
lift-off in rates until 2015.
In Basel, the influential head of the New York Fed, William
Dudley, did not comment specifically on the current policy
stance but spoke generally about the need for policies to be
"more accommodative than otherwise" in the wake of financial
The U.S. central bank must consider financial instability
when formulating its policies, Dudley said in comments that gave
a brief boost to U.S. bond markets in early trading.
"The stance of monetary policy needs to be judged in light
of how well the transmission channels of monetary policy are
operating," Dudley told the Bank for International Settlements.
"When financial instability has disrupted the monetary
policy transmission channels, following simple rules based on
long-term historical relationships can lead to an
inappropriately tight monetary policy."
Dudley, who repeated that the Fed has fallen short of its
employment and inflation objectives, is a close ally of Bernanke
and a strong backer of the unprecedented efforts to accelerate
the U.S. recovery from the 2007-2009 recession.
While neither Kocherlakota nor Fisher have votes on the
Fed's policy committee this year, Dudley has a permanent vote.