NEW YORK The Federal Reserve will very likely need to continue its large-scale asset purchases into the second half of this year, since a big improvement in the U.S. labor market is unlikely to have happened by then, a top central bank official said on Thursday.
"My own sense of this is that it is probably going to be a struggle to see by mid-year a clear indication that the outlook for the labor markets are in a new phase, and it's quite optimistic," Atlanta Fed President Dennis Lockhart said at a conference hosted by Bloomberg.
"So I would tend to believe that this bond purchasing will need to continue longer into the year," he added. "Whether it goes beyond that, I think, is a question that the (Fed policy) committee will take up in trying to weigh efficacy, costs and improvement."
To speed up the tepid U.S. economic recovery, the Fed is buying $45 billion worth of U.S. Treasury bonds and an additional $40 billion of mortgage-backed securities per month under its quantitative easing program, dubbed QE3.
Lockhart, a centrist monetary policymaker who does not vote on policy this year, later told reporters the Fed could taper its bond buying, and could also selectively reduce purchases of either Treasuries or MBS, when the time finally comes.
Investors are intensely focused on when QE3 might come to an end.
Minutes from the Fed's December meeting revealed that several policymakers expected to stop or slow the purchases well before the end of this year, yet Fed Chairman Ben Bernanke and other U.S. policymakers have said any decision will depend on how well the economy is doing.
Lockhart said he cannot see where a strong acceleration of growth would come from this year that could push U.S. economic expansion beyond his 2 to 2.5 percent forecast.
Meanwhile, the central bank's balance sheet has more than tripled to nearly $3 trillion since the financial crisis, as the Fed's presence has grown in bond markets. U.S. Treasuries touched a record high last year in large part due to the purchases.
Lockhart cautioned that the more the Fed's balance sheet swells, the more the potential for unanticipated outcomes, including the possibility that banks could retreat from markets.
"When a party (the Fed) is in control of such a large part of the market, maybe it doesn't make sense for individual institutions to deploy people and resources to participate in that market," he suggested.
"Over a long period of time, you'd have to be concerned that everyone who has got a Treasuries desk or a mortgage-backed securities desk is beginning to wonder whether it makes sense to continue to have that number of people on the desk," Lockhart told the conference.
"You could lose over a period of time the real human infrastructure it takes to have free markets in these securities," he added.
Still, Lockhart said he was "very comfortable" that the Fed could sell off its bonds and raise rates "in an orderly way."
(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama and James Dalgleish)