LITTLE ROCK, Arkansas The U.S. Federal Reserve should be careful not to over-stimulate the economy and stay focussed on an exit from its aggressive monetary expansion as growth resumes, two senior Fed officials said on Thursday.
St. Louis Federal Reserve Bank President James Bullard said the central bank would need to think about scaling back its economic support in the months ahead, while Richmond Fed chief Jeffrey Lacker said it should weigh whether to carry through with all of its current stimulus plans.
"As we head to 2010, the Fed will shift its focus to implementing an exit strategy in order to avoid any potential inflation threats to the economy," Bullard said in prepared remarks.
"Monetary policy is still very accommodative and the (Fed) intends to keep the fed funds target near zero for an extended period," he said, according to a summary of his presentation on the economic outlook at the College of Business at the University of Arkansas-Little Rock.
Bullard emphasized that the exit ought to mean allowing the Fed balance sheet to shrink, perhaps by selling assets that it purchased this year to counter the worst recession since the Great Depression, rather than speedy rate hikes.
Lacker, speaking earlier at an event in Danville, Virginia, suggested the Fed should consider now whether its planned purchases of mortgage securities might give the economy more of a boost than it needs.
"I will be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide," said Lacker, who is a voting member of the central bank's policy-setting committee this year.
The Fed plans to buy up to $1.45 trillion (891 billion pounds) of agency mortgage debt by December 31, 2009, as well as $300 billion of longer-dated U.S. government bonds by the end of October.
The purchases were designed to prevent a contraction in the U.S. monetary base as growth slumped. Policy-makers thought this could inflict a Japan-style deflation, or period of widespread falling prices, which would have made the U.S. recession much worse. As a result they
Both officials, who are generally viewed as sitting on the more hawkish, or anti-inflationary, wing of the Fed's policy-setting committee, said that the economy was showing signs of healing.
"Recent data suggest the economy is stabilizing, and there should be positive economic growth in the second half of 2009," said Bullard.
Their comments were somewhat at odds with remarks on Wednesday by Atlanta Federal Reserve President Dennis Lockhart, who said there should be no hasty move towards raising rates and who urged policy-makers to show patience before withdrawing monetary policy stimulus, to ensure the recovery take holds.
(Additional reporting by Mark Felsenthal in Danville Va., editing by Chizu Nomiyama)