The Federal Reserve's $600 billion bond-buying program helped solidify a shaky economic recovery and looks increasingly set to run its course, two top Fed officials indicated on Monday.
Atlanta Federal Reserve Bank President Dennis Lockhart, who voted for the controversial program on November 3, said he remained comfortable with that decision. Minneapolis Fed President Narayana Kocherlakota, who rotates into a voting slot this year, said the bond-buying would unlikely be cut short.
The measured endorsements of the plan, known as quantitative easing, or QE2, came as Fed presidents began laying out their policy positions for the year ahead and as recent data increasingly show the battered U.S. economy is on the mend.
Lockhart said QE2 had a role in that rebound.
(T)he economy seems to have gained durable momentum as we begin 2011, he said in comments prepared for delivery on Monday.
While things are looking better, I don't expect a quick fix, Lockhart added in a nuanced assessment that also highlighted some powerful constraining headwinds.
The Fed embarked on the $600 billion round of Treasury securities purchases on November 3. The unemployment rate fell to 9.4 percent last month, a still-high level that is well above what most Fed officials see as healthy.
Lockhart has defended the Fed's latest bond-buying program, putting him on the dovish end of the policy spectrum at the U.S. central bank.
Kocherlakota, generally seen as more hawkish, nonetheless told the Wall Street Journal the bar is very high for the central bank to cut short the full QE2 plan.
There would have to be a disorderly reaction of some kind in inflation expectations or in the behavior of the dollar, the Journal on Monday quoted Kocherlakota as having said in an interview. We're talking about relatively extreme events.
Kocherlakota, who has a vote this year on the Fed's policy panel, said he threw his support behind the bond purchase plan after colleagues argued persuasively that the policy would move monetary policy in the right direction -- even if it would not have a large impact.
QE2 is set to run through the end of June. The Fed may need to begin considering a reversal of policy by year end, Kocherlakota said in the interview.
Critics of the policy -- which takes the Fed under Chairman Ben Bernanke into uncharted territory -- say it lays the groundwork for a sharp run-up in inflation. Others say it could lead to asset bubbles in unexpected areas of the economy, and puts artificial pressure on the U.S. dollar.
Also on Monday, global central bank policymakers warned about the threat of resurgent inflation in fast-growing emerging economies and indicated a willingness to keep price pressures in check.
Lockhart, who does not have a vote on Fed policy this year, said that in the United States there is now little hint of a buildup of broad-based inflationary pressures.
His speech in Atlanta was canceled due to a snowstorm, but the regional Fed provided a copy of the text to reporters.
Recent data showed a boost in U.S. consumer spending and a drop in jobless benefit claims, suggesting the world's biggest economy is on the mend.
But the recovery is slow: U.S. data on Friday showed the economy generated a weaker-than-expected 103,000 jobs last month and revealed a troubling rise in the number of people exiting the work force -- some credence for backers of QE2.
Kocherlakota said he expects the U.S. economy to grow 3 percent to 3.5 percent this year, with inflation rising about 1.5 percent to 2 percent, according to the Journal. He said he expects the jobless rate to drop to close to 9 percent by the end of the year, but stay above 8 percent through 2012.
Weighing in on the jobs data, Lockhart said it confirmed the economy is moving forward but at a modest pace.
The rate of job creation is still below the level that will consistently bring down the unemployment rate, but the labor market is showing signs of improvement, he said.
Lockhart highlighted three elements that could hamper the United States' economic rebound from the worst recession in decades: regulatory and tax uncertainty; problems in the housing market; and damage to the credit market.
The past year has brought progress in dispelling uncertainty, but much remains to be done, Lockhart said.
On housing, he said he expected household deleveraging would continue this year.
The credit markets, Lockhart said, have improved but are still not fully healthy. I think the stage is set for some credit expansion in 2011, he said.
The U.S. Federal Reserve next meets to set monetary policy on January 25 and 26.
(Reporting by Jonathan Spicer; Additional reporting by Pedro Nicolaci da Costa in Atlanta, Ann Saphir in Chicago, and Tim Ahmann in Washington; Editing by Dan Grebler)