November 8, 2010 / 7:51 PM / 9 years ago

Fed officials voice concerns about bond buying

NEW YORK (Reuters) - Three top Federal Reserve officials on Monday voiced concerns about the central bank’s latest efforts to boost the economy, with one warning the Fed’s bond buying might need to be curbed to head-off inflation.

The U.S. Federal Reserve Building is pictured in Washington, December 15, 2009. REUTERS/Hyungwon Kang

The remarks from Fed Governor Kevin Warsh, Dallas Fed chief Richard Fisher and Thomas Hoenig of the Kansas City Fed underscored the unease within the central bank about the decision to buy an additional $600 billion in government debt.

Last week’s decision has sparked an unusually vocal public debate among Fed officials and drawn the ire of many countries that say the United States is deliberately pushing down the dollar.

Warsh raised the prospect that rising inflation risks could prompt the central bank to scale back the program even with unemployment still painfully high.

“Policies should be altered if certain objectives are satisfied, purported benefits disappoint, or potential risks threaten to materialize,” Warsh said.

“We haven’t bought ourselves an eight month holiday. We bought ourselves eight months of hard work,” he said.

St. Louis Fed President James Bullard also stressed that the program could be adjusted up or down as the economic outlook develops.

But he said while worries the policy could create high inflation down the road were “legitimate and important”, it is the disinflationary trend that “is worrisome right now.”

For Bullard, the benefits of the unconventional bond-buying program currently outweigh the risks, and he said it should prove as effective as traditional policy in spurring growth.

Warsh, who like Bullard voted for the Fed’s program last week, said he was less optimistic than some that additional purchases would have “significant, durable benefits for the real economy.”

Fisher said that for the program to work, lawmakers must address the fiscal and regulatory uncertainties that he said were holding back businesses from expanding.

“I would suggest that even if you share my cautious perspective on this matter, you might be assuaged by looking at this new initiative as a bridge loan to fiscal sanity,” he told a meeting of financial professionals in San Antonio.

Bullard said he would have preferred if the Fed had not announced the $600 billion number upfront, but rather taken a more incremental approach.

“The problem is such a number can take on a life of its own,” he said.

WORLD CAN’T CALL SHOTS ON FED POLICY

Many economists think the Fed could eventually decide to push beyond the $600 billion in purchases announced last week, notwithstanding differing views within the central bank. <FED/R>

The Fed’s decision to buy more debt, over and above the $1.7 trillion in government and mortgage-related debt it has already bought, has drawn scathing comments from countries that see the United States pushing for an export edge.

In response to an audience question about complaints by countries such as China and Germany about the Fed’s decision, Bullard said the U.S. central bank must act to fulfill its mandate of price stability and maximum employment.

“You can’t have other people around the world calling the shots on that mandate,” he said.

Warsh, however, said heightened tensions in currency and capital markets raised the risk of a more difficult and protracted global economic recovery. He said these long-term risks need to be taken into account.

Hoenig, the lone dissenter on the Fed’s decision, said the move to buy more bonds increases chances the central bank will face pressure in the future to finance U.S. budget deficits,

The Fed is already facing criticism from the political front.

Tea Party favorite and 2008 Republican vice presidential nominee Sarah Palin on Monday suggested Fed Chairman Ben Bernanke “cease and desist” with his plan to buy more government debt.

“We shouldn’t be playing around with inflation,” she said.

Additional reporting by Ann Saphir in San Antonio, Mark Felsenthal and Tim Ahmann in Washington, Edward Krudy and Jonathan Spicer in New York and Christine Stebbins in Omaha; Editing by Dan Grebler and Andrew Hay

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