Federal Reserve officials differed on Thursday over the urgency of withdrawing monetary stimulus on Thursday, with some saying inflation is in check despite oil price rises while others warned of risks if the central bank drags its feet.
The recent surge in oil prices is no prelude to broader price increases that would force the U.S. Federal Reserve to raise interest rates, two of the policy hawks, Minneapolis Fed President Narayana Kocherlakota and Fed Board Governor Elizabeth Duke, said in speeches.
Both officials are viewed as toward the center of the spectrum of Fed officials and their comments appear to reflect the consensus opinion at the Fed.
The Fed will eventually sell assets and raise rates to head off inflation, but right now there's not really much sign of inflationary pressures building up, Kocherlakota told local business leaders and citizens in Helena, Montana.
Their comments echoed recent remarks by Fed Chairman Ben Bernanke and added to expectations the central bank will stay on course with its $600 billion debt-buying program through the end of June and will not look to reverse its super-easy monetary policy any time soon.
HAWKS SEE COURSE CORRECTION SOON
Governor Daniel Tarullo allied himself with that camp, saying there are no signs that higher overall inflation, spurred by surging energy and commodity prices, will translate to underlying inflation. Tarullo, answering questions while speaking on a panel In Washington, said commodity prices are notoriously volatile.
Even so, two prominent anti-inflation hawks, Richmond Fed President Jeffrey Lacker and Philadelphia Fed President Charles Plosser, said the recovery is strong and suggested the Fed needs to prepare to pull back some of the extensive backing the central bank has provided the world's largest economy to get it through one of the worst financial panics on record.
The apparent strengthening of the U.S. economy suggests that, in the not-too-distant future, monetary policy will begin reversing course from a very accommodative policy stance, Plosser said in New York.
The vocal concerns of the hawks suggest an intense debate will take place at the Fed's April 26-27 meeting over when and how to move to the exits.
The Fed last November began buying hundreds of billions of dollars worth of long-term Treasury debt, its second round of asset purchases to battle the recent recession. The purchases are meant to lower the real cost of borrowing even further than the near-zero short-term interest rates that the Fed has kept in place since December 2008.
Fed officials must now decide whether they are in fact done with their easing, as many of their comments suggest, and how long they will remain on hold before beginning to remove that support.
Then they must agree on how to pull back: whether by raising benchmark interest rates first, and then selling off some of the hundreds of billions of securities they have added to its balance sheet, to start by selling assets, or a hybrid approach.
LACKER: SHOULDN'T DELAY ASSET SALES
While nothing is assured, it is more likely than not that the end of June will bring an end to the Fed's easing, Lacker said.
The importance of shedding mortgage-related debt from the Federal Reserve's holdings suggests the Fed shouldn't delay selling asset sales from its portfolio, Lacker told reporters after a speech in Baltimore.
We ought to have an outright preference to get to a Treasuries-only portfolio as soon as this episode is over, he said. That to me is an argument for advancing the date of asset sales.
Halting reinvestment of securities that are rolling off the balance sheet would be likely before sales, Lacker said.
That's an obvious approach, he said.
Duke, Kocherlakota, Plosser and Tarullo all have votes on the Fed's policy setting panel while Lacker does not.