Tags: Fed | Pianalto | QE | bond buying

Fed's Pianalto Floats Reducing Asset Buying This Year

Friday, 15 Feb 2013 10:51 AM

It would be wise to reduce the Federal Reserve's level of asset purchases before year end if the economy continues to improve, a top U.S. central bank policymaker said on Friday.

Cleveland Fed President Sandra Pianalto said she does in fact expect the world's biggest economy to improve in 2013, with economic growth of better than 2.5 percent and a drop in the unemployment rate to 7.5 percent.

In a speech to a business audience, she outlined a number of risks posed by the Fed's program of buying $85 billion in assets per month, including credit and interest-rate risks, as well as inflation and possible harm to the functioning of markets.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

"To minimize some of these risks, we could aim for a smaller-sized balance sheet than would otherwise occur if we were to maintain the current pace of asset purchases through the end of this year, as some financial market participants are expecting," Pianalto told a business audience at Florida Gulf Coast University, reviewed by Reuters via audio feed.

"This course of action would be all the more attractive if the economic outlook continues to improve, as I expect it will."

While Pianalto did not specify when she would like to see a reduction in the Fed's so-called quantitative easing program - now in its third round (QE3), nor by how much, her comments could give credence to those expecting the unprecedented monetary policy accommodation to taper or stop this year.

Pianalto does not have a vote on Fed policy this year, but she is usually aligned with Fed Chairman Ben Bernanke's more dovish core on decisions.

Besides QE3, the central bank has promised to keep interest rates near zero until the unemployment rate falls to 6.5 percent, from 7.9 percent last month, as long as inflation remains contained.

"While our policies have been effective, our experience with our asset purchase programs is limited, and, as a result, we must analyze their benefits and costs carefully," Pianalto said in her first public comments on policy since September.

"Over time, the benefits of our asset purchases may be diminishing."

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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