A shift in the Federal Reserve's accommodative monetary policy will likely come before it is clearly necessary based on economic data and could be rapid, a top Fed policymaker said on Friday.
If policymakers insist on waiting until the level of real activity has plainly and substantially returned to normal -- and the economy has returned to self-sustaining trend growth -- they will almost certainly have waited too long, said Fed governor Kevin Warsh.
The velocity of the policy turn could also be faster than many expect, Warsh said a Chicago Fed/World Bank conference, and echo the dramatic moves made by the U.S. central bank during 2007 through 2009.
If 'whatever it takes' was appropriate to arrest the panic, the refrain might turn out to be equally necessary at a stage during the recovery to ensure the Fed's institutional credibility, he said.
The hawkish remarks echoed those made by Warsh in an op-ed piece in The Wall Street Journal published on Friday.
That article, which suggested a more pro-active policy shift, prompted dealers to push up the implied chances for Fed rate hikes in the first half of 2010. U.S. Treasury yields rose again on Warsh's remarks.
Warsh said that data in the past couple of months show continued improvement in the economy and that a virtuous circle could be developing between more stable financial markets and real economic activity.
In contrast to the languid pace of policy change suggested on Thursday by White House aide Christina Romer, who said that talk of a fast exit strategy made her cringe, Warsh suggested the Fed not muck around.
Ultimately, when the decision is made to remove policy accommodation further, prudent risk management may prescribe that it be accomplished with greater swiftness than is modern central bank custom, he said. The speed and force of the action ahead may bear some corresponding symmetry to the path that preceded it.
The Federal Open Market Committee slashed its benchmark federal funds rate from 5.25 percent to the current range of zero to 0.25 percent in a series of moves from September 2007 to December 2008.