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Two Fed officials downplay worries over end to stimulus
June 25, 2013 / 8:24 AM / 4 years ago

Two Fed officials downplay worries over end to stimulus

(Reuters) - Less than a week after the 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 meeting.

“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 .SPX 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. economy.

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.

The Federal Reserve Building stands in Washington April 3, 2012. REUTERS/Joshua Roberts

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 crises.

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.

Additional reporting by Marc Jones and Francesco Canepa in London, and Alister Bull in Washington; Editing by Chizu Nomiyama

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