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Fed officials criticize, explain taper delay

Policymakers hit speech circuit as markets continue to puzzle over Fed stance

Reuters New York
Last Updated : Sep 21 2013 | 10:48 AM IST
An outspoken Federal Reserve hawk warned on Friday that the US central bank had harmed its credibility by delaying a highly anticipated reduction in monetary stimulus this week, but another official argued it had been the right thing to do.

Policymakers hit the speech circuit as financial markets continued to puzzle over Wednesday's shock decision by the Fed not to scale back its massive bond-buying program after allowing the impression over the summer that it would do so.

Kansas City Fed President Esther George, the lone dissenter on Wednesday, said she had been "disappointed" by the decision not to begin normalizing policy after an unprecedented period of ultra-easy US money that has already lasted five years.

"The actions at this meeting, and the expectations that have been set relative to how markets were thinking about this, created confusion, created a disconnect," said George. She has dissented at every Fed meeting this year out of concern its policies could foster future asset bubbles and inflation.

St. Louis Fed chief James Bullard, defending the decision, said low inflation meant the central bank could be patient in deciding when to act, although the prospects for tapering would pick up if payroll and unemployment data brightened further.

Speaking with reporters afterwards, Bullard said the Fed's decision to sit tight "enhanced our credibility in the sense that it showed we really are paying attention to data and not on some automated program to cut QE (quantitative easing) to zero."

Fed policymakers could still decide to start reducing bond purchases when they meet again in late October, Bullard said, if inflation and unemployment data warrant it.

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A Reuters poll of economists found that a majority of those surveyed felt the Fed failed to communicate clearly in the weeks before Wednesday's decision to stand pat.

Previous polls anticipated a September move, and the surprise announcement sparked a sharp drop in bond yields, reversing some of the rise which had built up since the Fed said in June that it expected to start scaling back later this year.

Declining borrowing costs could help restore momentum to tepid US growth and hiring.

Bullard, a committee voter this year, said he supported the decision not to alter the current pace of bond purchases, and would not favor any action until inflation reverted from what he views as a worryingly low trend.

"While I expect inflation to rise during the coming quarters, I want to see evidence of such an increase before endorsing less accommodative policy action," he said.

The policymaker, who is usually viewed as a centrist, said in an earlier interview on Bloomberg television that the Fed could still decide to act at its next meeting, at the end of October.

George, a consistent critic of current policy since becoming a voting member on the policy-setting Federal Open Market Committee, said the central bank's low-rate policy could lead to asset-price bubbles.

"Waiting for more evidence at this point in the face of continued economic growth unnecessarily discounts the very real progress that we see, and it also discounts the potential costs of the policy tool," she told the Shadow Open Market Committee, a group critical of the Fed's current policy stance.

Bullard said the Fed's unprecedented monetary easing, which began when it cut overnight interest rates to zero in 2008 and has continued through three rounds of bond purchases, has been "fairly successful" and said he sees no sign of asset bubbles.

"The bubbles we had in the past were gigantic and obvious. I don't see anything like that going on right now," he said.

Two other central bankers spoke on Friday, but neither commented directly on monetary policy. Fed Board Governor Daniel Tarullo addressed banking regulation at an event hosted by Yale University. Minneapolis Fed chief Narayana Kocherlakota spoke in New York on the role that options can play in helping policymakers make decision.

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First Published: Sep 21 2013 | 8:08 AM IST

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