| WINCHESTER, Va./DETROIT
WINCHESTER, Va./DETROIT Feb 4 The Federal
Reserve will likely continue to cut its massive bond-buying
program by $10 billion at each meeting unless the economy veers
sharply from expectations, two top Fed officials from opposite
ends of the policy spectrum said on Tuesday.
But the two policymakers, Chicago Fed President Charles
Evans and Richmond Fed President Jeffrey Lacker, disagreed on
how long rates should stay low.
Lacker, whose concern with the threat of inflation marks him
as a hawk, called for a rate rise in early 2015. Evans, a policy
dove focused on the threat of high unemployment, said he
preferred to wait until "well into" 2015.
Those differences signal what may be the biggest debate at
the Fed's next scheduled policy meeting, in March: how to tweak
so-called forward guidance for short-term interest rates. The
meeting will be the first run by new Fed Chair Janet Yellen.
"We are going to have a lot of conversations about that,"
Evans said. "We've had conversations already."
The Fed has used near-zero rates since December 2008 and
trillions of dollars of bond-buying to keep borrowing costs down
and pull the economy out of the aftermath of the 2007-2009
Citing an improved outlook for jobs, the U.S. central bank
has started to trim its stimulus by reducing asset purchases by
$10 billion at each of its last two policy meetings.
A dismal December U.S. jobs report and a rout in emerging
markets as the Fed signaled that its wind-down of the
bond-buying program will continue had raised some expectations
of a change of heart at the world's most powerful central bank.
Evans, who does not have a vote on the Fed's policy-setting
panel this year but nevertheless is seen as an influential force
in discussion, signaled little patience with such a view.
"With the better sustainable growth that we've seen recently
- the employment numbers have been good, unemployment has come
down - I think it's the right time and approach to moderately
reduce our asset purchase pace," he told reporters after a
speech in Detroit. "I think it's probably a high hurdle to
deviate from that $10 billion pace over the next several
meetings," he said, adding that the wind down should not come as
a surprise to world financial markets.
Evans' words echoed those of his hawkish counterpart at the
Richmond Fed, who earlier in the day said U.S. stocks had
performed well looking at the past year and recent moves likely
reflected a downward adjustment in expectations for growth.
"I think the hurdle ought to remain pretty high for pausing
in tapering," Lacker, who has long opposed the aggressive
stimulus, told reporters. Like Evans, Lacker does not vote on
Fed policy this year.
"We linked the asset purchase programs to significant
improvement in the outlook for labor market conditions, that has
definitely occurred, and I don't see financial market
developments as having affected the outlook for labor market
conditions materially at this point."
The Fed last week trimmed its monthly asset-purchase
program, known as QE3 because it is the Fed's third round of
quantitative easing, to $65 billion.
Policymakers will not meet again until March. Lacker said he
expected the current pace of a $10 billion reduction every
meeting to continue and played down the chance of a bigger move.
Weak U.S. data pushed the benchmark S&P 500 index into its
worst single-day drop in seven months on Monday and MSCI's
benchmark index for emerging market stocks hit its
lowest level since August.
Lacker, who is among the more hawkish of the Fed's 17
current policymakers, said markets might be coming in line with
his view that economic growth would slow this year to "a little
above" 2 percent, citing muted spending by consumers and
businesses and modest expected labor productivity.
"I think maybe now (they are) revising down their sense of
how much momentum the second half is really providing us," he
said in response to a question.
Lacker's forecast is at the low end of predictions, of
between 2.2 percent and 3.3 percent GDP growth, made in December
by Fed policymakers. Inflation, Lacker said, will rise back to
the Fed's 2-percent target in the next year or two, and the Fed
will probably need to start raising rates in early 2015.
Evans, one of the Fed's most dovish policymakers, was more
optimistic on growth, but less so on inflation. Though he sees
better momentum coming into 2014, he said he is nervous about
the prospect of inflation taking several more years to reach the
Meanwhile unemployment, at 6.7 percent, is still well above
the 5 percent to 5.25 percent rate he sees as normal.
"I currently expect that low inflation and still-high
unemployment will mean that the short-term policy rate will
remain near zero well into 2015," he said.
In a formulation of forward rate guidance that Evans himself
had a hand in crafting, the Fed currently promises to keep rates
low until well past the time that inflation falls to 6.5
percent, especially if inflation stays below 2 percent.
Once the jobless rate falls to 6.5 percent, he said, there
could be "modest" adjustments to that promise, including
deleting any reference to a particular level of unemployment.
"I think what's most important is that inflation begins to
go back up to 2 percent before too long," Evans said.