Containing inflation will be critical when the time finally comes for the U.S. Federal Reserve to reverse its ultra loose monetary policy, two top Fed officials said on Thursday.
With inflation hovering near the Fed's 2.0 percent target, the focus for U.S. policymakers has been kick-starting economic growth and lowering the 8.3 percent unemployment rate. Still, there are lingering concerns that the central bank's unprecedented actions have sown the seeds for a possible big jump in prices.
As always, we have to look at the inflation side and be comfortable that price stability will be maintained and that inflation will be low and stable, Fed Chairman Ben Bernanke told students at George Washington University.
Those are the things we'll be looking at. There's no simple formula but as the economy strengthens and becomes more self-sustaining then at some point...the need for so much support from the Fed will begin to diminish, Bernanke said.
Less than a month before the next Fed policy meeting, talk of raising interest rates or selling some of the nearly $3 trillion in assets on the U.S. central bank's balance sheet is still a long way off.
Instead, markets speculating that the Fed could embark on a third, controversial round of large-scale bond buying, known as quantitative easing, or QE3, after Bernanke earlier this week stressed the need to support the labor market.
Earlier on Thursday, data showed new U.S. claims for jobless benefits fell slightly last week.
If economic conditions continue to improve, pressure could grow later this year to reverse course, said Philadelphia Fed President Charles Plosser.
If growth continues to improve, the unemployment rate continues to fall, then there will be increasing pressure on us to begin easing off of our policy stance, he told reporters after addressing the Rotary Club of Wilmington.
In the absence of some shock that derails the recovery, we may well need to raise rates before the end of 2014, Plosser said. Even if the U.S. federal funds rate was raised to 0.75 percent, Plosser added, we're still going to be in a very accommodative stance of policy.
The central bank has kept short term interest rates near zero since late 2008, bought $2.3 trillion in assets in QE1 and QE2, and said it expected to keep rates exceptionally low through late 2014 in an unprecedented effort to revive the economy from the brutal recession.
Raising rates would be an attempt to head off future inflation. Yet with the Fed balance sheet so bloated and wild cards like volatile oil prices complicating matters, tightening policy after the Great Recession could be tricky.
We've never been in this situation... We don't know how rapidly we might have to raise interest rates, Plosser said, adding he is confident the Fed will ultimately manage to avoid an inflationary surge.
The Fed's policy meeting is set for April 24-25.
(Additional reporting by Jason Lange in Washington)