* Fed's Stein: decision not to taper in Sept was "close
* Hawk Lacker warns Fed could lose face if it acts in
* Kocherlakota - Fed has only itself to blame for volatility
By Sakari Suoninen, Alistair Scrutton and Ann Saphir
FRANKFURT/STOCKHOLM/HOUGHTON, Mich., Sept 26 The
Federal Reserve confused financial markets over scaling back its
bond buying, three top officials said on Thursday, with one
arguing the central bank should link tapering to drops in the
jobless rate and another calling for a broad remake of strategy.
Fed Board Governor Jeremy Stein said he would have been
comfortable with acting at the Sept. 17-18 meeting, and the
decision to keep buying bonds at an $85 billion monthly pace had
been, for him, a "close call".
"But whether we start in September or a bit later is not in
itself the key issue - the difference in the overall amount of
securities we buy will be modest," he told a monetary policy
conference in Frankfurt.
"What is much more important is doing everything we can to
ensure that this difficult transition is implemented in as
transparent and predictable a manner as possible. On this front,
I think it is safe to say that there may be room for
improvement," he said in prepared remarks.
The Fed's decision to stand pat on bond buying stunned
financial markets, which had anticipated it would begin to
slowly reduce the program, signaling the beginning of the end to
an unprecedented five years of ultra-easy monetary policy.
Federal Reserve Chairman Ben Bernanke explained the decision
last week by pointing to the disappointing performance of the
U.S. economy in the second half of 2013. It also noted headwinds
from tighter U.S. fiscal policy, which could worsen as leaders
in Washington fight over a deal to keep the government funded
and lift the U.S. debt limit.
Investors are now focused on Fed meetings in October and
December, although some economists say the central bank could
hold fire until 2014 to make sure the U.S. economy has
decisively regained cruising speed.
But Richmond Federal Reserve President Jeffrey Lacker, one
of the Fed's most hawkish officials who has been urging for
months that it taper bond buying, said that the central bank had
boxed itself in by failing to move last week.
"It could be hard to do it (tapering) in October without
losing face, but I don't see why we couldn't do it," he told a
banking conference in Stockholm. "It's going to be harder for us
to communicate credibly in the future," he told reporters.
Lacker is not a voting member of the policy committee this year.
A third official, Minneapolis Fed chief Narayana
Kocherlakota, said the Fed had only itself to blame if markets
swing wildly in "misguided" reaction to its meeting-by-meeting
decisions on bond buying.
"It is a problem of the (Fed's) own making, because we have
not been sufficiently clear about what we are going to do down
the road," he said.
He called for a renewed focus by Fed policymakers on
bringing down unemployment, like former Fed Chairman Paul
Volcker's single-minded focus on bringing down inflation in
The central bank, he said, should do whatever it takes to
drive U.S. unemployment lower, although not necessarily by
buying even more bonds. For instance, it could lower the
interest rate it charges banks to keep their excess reserves at
the Fed, he said.
What matters is not the specific "tactic," he said, but the
"What the committee chose to do in September was fully
consistent with everything that had been communicated,"
Kocherlakota told reporters after his talk. But what has been
communicated, he said, is insufficient, as is the level of
stimulus the Fed is providing the economy.
"I think we've set ourselves up in a very awkward position
where every action, no matter how minute the economic
consequences of that action, and every communication about that
action, no matter how minute that communication might be, is
having very undue consequences on people's beliefs about the
course of future policy," he said. "We should be communicating
more effectively that we are about having the economy recover as
fast as possible, as long as inflation stays close to, possibly
temporarily above, but close to 2 percent."
Kocherlakota is one of the Fed's most dovish members, and on
Thursday reiterated the Fed should keep interest rates near zero
until unemployment reaches 5.5 percent, though he cast doubt on
whether the rate truly captures the state of the labor market.
The nation's jobless rate fell to 7.3 percent in August, but
remains well above historically normal levels. The decline was
also subject to caution because it reflected the departure of
workers from the labor force, rather than being entirely due to
stronger new job creation.
There are millions of Americans who have either given up
looking for work or are getting fewer hours of employment than
they would like, due to the still-tepid state of the labor
market following the nation's severe 2007-2009 recession.
Stein, who has talked about the risk of Fed bond buying
leading to asset bubbles, said that one way to reduce
uncertainty and accompanying market volatility would be to link
cuts in bond buying directly to economic data.
"My personal preference would be to make future step-downs a
completely deterministic function of a labor market indicator,
such as the unemployment rate or cumulative payroll growth over
some period," Stein said. "For example, one could cut monthly
purchases by a set amount for each further 10 basis point
decline in the unemployment rate."
This echoed a suggestion made earlier in the year by St.
Louis Fed chief James Bullard, perhaps signaling growing support
on the Fed's policy-setting committee to adopt such an approach.