The U.S. Federal Reserve must for now continue to push hard against threats to the country's economic recovery, but should still be able to reduce its support for the economy later this year, an influential central bank policymaker said on Monday.
In a strong defense of the Fed's shock decision last week to keep buying bonds unabated, New York Fed President William Dudley warned in a speech that fiscal uncertainties "loom very large" as Congress prepares to hash out a deal to avoid a government shutdown and raise the nation's debt ceiling.
At a separate New York event, Atlanta Fed President Dennis Lockhart likewise warned that America risked "losing its economic mojo" unless lawmakers worked to reverse declines in labor productivity and new job creation.
In San Antonio, the hawkish chief of the Dallas Fed, Richard Fisher, told reporters that he had pushed for the Fed to reduce its monthly purchases by $10 billion U.S., and warned that by standing pat the Fed had hurt its credibility.
Last week, investors were stunned when the Fed decided not to reduce its asset purchases from the current $85-billion U.S. monthly pace, sparking a global stock rally. The decision prompted criticism that policymakers got cold feet despite improving employment and economic growth, and that they misled investors.
But Dudley, a close ally of Fed Chairman Ben Bernanke, highlighted drags from the sharp recent rise in longer-term interest rates, higher taxes and lower public spending adopted earlier this year, as well as growing questions over the debt limit and government funding.
Stocks and bonds surged and the U.S. dollar dropped last week after the Fed's policy decision.
Many economists wondered whether Bernanke had backpedaled from a plan that he articulated in June in which the Fed aimed to reduce the purchases later this year and to halt the quantitative easing (QE) program altogether by mid-2014, as long as the U.S. economy keeps improving.
Dudley said on Monday that framework "is still very much intact." He noted that, back in June, Bernanke did not specify the first reduction to QE would come in September, and that it would be dependent on economic data.
Any reduction in QE must be based on the most recent measures of economic health, Dudley said, arguing that two requirements have not yet been met: evidence the labor market has improved and confidence that those gains will continue.
