Fed's Bullard impatient about Fed rate pledge

I'm a little worried that the extended period language is conveying too much of a particular date to markets about ... interest rates, St. Louis Federal Reserve Bank President James Bullard told reporters before speaking on a panel organized by St. Cloud State University.

I think the extended period language, to the extent it's dictating a particular time horizon, is not what the committee wants to do, said Bullard, a voter on the Fed's interest-rate setting panel. And that's making me a little less patient with the extended period language.'

Bullard's stance allies him with Kansas City Fed Bank President Thomas Hoenig, who dissented at the central bank's January meeting, saying economic conditions have improved sufficiently to drop the promise. Both are voters this year on the 10-strong policy-setting Federal Open Market Committee.

Most policy-makers want to maintain the pledge and the Fed is expected to renew it at its meeting this month. Discarding it would signal that the Fed could be within several months of raising borrowing costs.

EVANS: TIGHTENING SOME TIME AWAY

Chicago Federal Reserve Bank President Charles Evans said after a speech that he agrees with the wording and would need to see a strong recovery and a pick-up in hiring before tightening financial conditions. An increase in inflation, and thus the need to raise ultra-low rates, is still some time away, said Evans, who is not a Fed voter this year.

Evans' comments reflect the consensus of Fed policy-makers, who believe high unemployment and low inflation warrant low rates for a long time.

Policy makers will be watching to see whether the recovery is truly vibrant or whether it is gaining momentum only gradually, he said.

Removing the policy accommodation is still quite a ways away, he said.

The Fed has said that when that time comes, it is likely to begin by draining some of the huge quantity of reserves it pushed into the financial system, and then raise interest rates. Most observers do not expect that process to begin until employers resume hiring and the unemployment rate -- which is expected to have ticked up to 9.8 percent in February -- eases.

When the economic recovery solidifies, the central bank could begin selling some of the $1.7 trillion in assets it bought to provide an additional boost to the economy after it had already chopped interest rates to close to zero, policy-makers have said.

ADJUSTING ASSET HOLDINGS

Bullard argued for a more aggressive approach, saying the Fed should shift quantitative easing policies -- a reference to the asset purchases -- based on the economy's evolution, in the same way those changes guide interest rate policy.

This means adjusting the policy according to incoming information in the economy, he said in a speech at the university where he was an undergraduate student.

Bullard made clear he believes the Fed's super easy monetary policy is appropriate for the current early stages of economic recovery.

But at some point the Fed will have to begin reversing that policy or run the risk of fueling inflation in the medium term, he said.

Turning to regulatory reforms that Congress is weighing, Bullard warned against stripping the Fed of oversight powers and of taking steps that could be seen as pulling the Fed under tighter congressional control.

Erosion of Fed independence could result in a 1970s-style period of volatility, he said. The 1970s were marked by painfully high inflation that required unusually high interest rates and a difficult double-dip recession to break.

While there has been widespread criticism of the Fed for creating conditions that led to the housing bubble and regulatory lapses, the central bank may gain powers as a result of regulatory reforms before Congress.

Lawmakers are debating whether to house a consumer protection agency at the Fed and whether to put the central bank in charge of policing the stability of the broad financial system.

(Reporting by Mark Felsenthal; editing by Andrew Hay)