U.S. Federal Reserve officials mused about the timing and pace of the central bank's removal of its unprecedented support for the economy on Friday, saying the shift could be abrupt and might be hard to communicate to financial markets.

A shift in the Fed's policy could come before it is clearly necessary based on economic data and could be swift, Fed Governor Kevin Warsh said at a Chicago Fed/World Bank conference.

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, he said.

The Fed earlier this week announced it would begin tapering off some of its exceptional support for the economy amid early signs of growth after a painful recession while renewing a pledge to hold benchmark interest rates exceptionally low for a long time.

Warsh's comments suggest he is among policy-makers anxious that a too-slow removal of support policies and raising of interest rates risks igniting inflation.

However, he played down any notion that his remarks are a sign a shift in Fed policy would come soon.

I'm confident markets will not conflate those (frank discussions of the policy outlook) with imminence, Warsh said while answering questions after a speech in Chicago.

The U.S. economy may be looking up, but is still in a long, long period of repair, he added.

Fed Chairman Ben Bernanke said earlier in the day to a congressional group that demand for the Fed's program backing consumer and small business loans remains strong but that demand for many of the Fed's facilities aimed at making short-term funds available is fading.

Warsh said velocity of the policy turn could also be faster than many expect 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 following Warsh's comments.

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 act decisively.

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.

St. Louis Fed Reserve President James Bullard said on Friday it is difficult to communicate the Fed's likely monetary policy direction clearly to markets with benchmark interest rates near zero.

He suggested in a presentation at a Swiss National Bank conference in Zurich that policymakers settle on some type of rule for explaining how the U.S. central bank's purchases of long-term securities should be adjusted in response to changing economic conditions.

Quantitative rules are generally not as satisfactory as interest rate rules, Bullard said. But it is still worthwhile to use them because of the need to communicate future monetary policy to markets.

The Fed has resorted to buying assets and other forms of pumping liquidity into the markets, or so-called quantitative easing, as it exhausted its ability to cut borrowing costs to stimulate the economy.

A copy of his presentation was made available in Washington.

The Fed cut rates to near zero in December to help the economy weather a wrenching financial crisis. To continue to lower borrowing costs, policymakers began buying hundreds of billions of dollars worth of longer-term Treasury and mortgage-related securities.