Top Fed officials zero in on next policy steps

Sat Jan 4, 2014 5:15pm EST
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By Jonathan Spicer

PHILADELPHIA (Reuters) - The U.S. Federal Reserve, having just reduced its bond-buying program, now appears deep in debate over the best way to unwind its extraordinary stimulus in the months and years ahead.

Wrapping up a big economics conference in snow-swept Philadelphia, a handful of top U.S. central bankers were sometimes at odds over the ideal pace at which to wind down the purchases and, eventually, start to shrink the Fed's balance sheet and raise interest rates.

The Fed has held benchmark rates near zero since late 2008 to spur growth and hiring in the wake of the Great Recession. It has also quadrupled the size of its balance sheet to around $4 trillion through three rounds of massive bond purchases aimed at holding down longer-term borrowing costs.

In what came as a surprise to some, the Fed decided last month to cut its current quantitative easing program, or QE3, by $10 billion to $75 billion per month. It cited a stronger job market and economic growth in its landmark decision, which amounts to the beginning of the end of the largest monetary policy experiment ever.

Boston Fed President Eric Rosengren dissented against that decision. On Saturday he urged patience as the Fed continues to trim the purchases, in part because he said it risks a permanent rise in the number of Americans who are out of work.

"The failure of monetary and fiscal policy to generate a more rapid recovery risks creating a long-term structural unemployment problem out of a severe cyclical downturn," the dovish Fed official said at the meeting of the American Economic Association.

U.S. unemployment has dropped from a post-recession high of 10 percent in 2009 to 7.0 percent in November, a five-year low. Still, the proportion of the unemployed who have been so for more than six months remains high, at almost 40 percent.

In what might be his last keynote speech as Fed chairman, Ben Bernanke told the conference on Friday that the economic recovery has a long way to go, and that the Fed is committed to stimulus as long as needed. Last month, he said the Fed plans to keep buying bonds through much of the year.   Continued...

A view shows the Federal Reserve building on the day it is scheduled to release minutes of the Federal Open Market Committee from August 1, 2012, in Washington August 22, 2012 file photo. REUTERS/Larry Downing