Fed officials signal next policy battle: rate guidance

Thu Nov 21, 2013 4:57pm EST
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By Jonathan Spicer and Jason Lange

ROGERS, Ark./ASHEBORO, NC (Reuters) - As the Federal Reserve nears a decision to pare its bond-buying program, top policymakers on Thursday turned to a new monetary policy battlefront: a growing debate over how the Fed should signal the timing of eventual interest rate hikes.

Top Fed officials at opposite ends of the policy spectrum still disagree on the optimal future for the Fed's $85-billion-a-month bond-buying program.

The president of the St. Louis Federal Reserve Bank, James Bullard, on Thursday said accommodative bond-buying should continue because there are no signs of price rises so far, while Richmond Fed President Jeffrey Lacker at a separate event reiterated his opposition on grounds the program is ineffective.

But minutes from the Fed's last policy meeting suggest officials are preparing to reduce the pace of bond-buying in coming months as long as the economy continues to improve.

When they do, the policy debate may shift to "forward guidance": the language the Fed uses to tell markets how long it will keep short-term rates near zero, where they've been for nearly five years.

Already, policymakers are talking about it, and signs point to more muscular language around rate guidance, rather than adding numerical thresholds or adjusting current ones.

The Fed has promised to hold rates near zero until unemployment hits 6.5 percent, provided the outlook for inflation stays under 2.5 percent.

Bullard has long been an advocate of adding an inflation floor to assure markets that the Fed will not raise rates if inflation continues to linger at a level that is too low for comfort.   Continued...

James Bullard, President of the St. Louis Federal Reserve Bank, speaks during an interview with Reuters in Boston, Massachusetts August 2, 2013. REUTERS/Brian Snyder