The U.S. Federal Reserve has yet to decide how it will start to reverse its unprecedented rescue of the U.S. economy and is likely to take several months before making its first moves, a top Fed official said on Tuesday.
In an interview with Reuters Insider, St. Louis Federal Reserve Bank President James Bullard said the Fed was looking at launching its exit strategy by raising its near-zero interest rates or selling some of the nearly $2 trillion in bonds it has amassed.
Doing both at the same time was possible too, he said.
"The debate about how to exit this loose, uber-easy monetary policy is again coming to the fore."
Bullard, a non-voter this year on the Fed's policy-setting panel but whose views are often representative of its middle ground, has all but conceded he won't persuade his peers to cut short the Fed's $600 billion bond-buying initiative.
Instead, the easing program will probably be completed in its full amount through June.
"If things are as strong as I think they'll be through 2011, the presumption is the next move after that will be some kind of tightening, and that tightening could be either on the balance-sheet side or on the interest-rate side."
"Both things will be going on at once at some point," he said. "It's just a question of do you want to start initially with both shrinking the balance sheet and raising interest rates."
Bullard said his preference for the first step in tightening credit, when the time comes, was the sale of some of the securities the Fed has accumulated rather than raising interest rates.
His position points to an intense debate over exit strategy at the Fed's next meeting on April 26-27 and in coming months. Divisions have emerged between policymakers about the speed of the Fed's next steps amid signs of higher inflation.
Before taking its next step after the bond-buying program winds up in June, Bullard said the U.S. central bank would likely pause for "a few meetings."
"This would be a pause that involves both the balance sheet policy and the interest rate policy, and you'd stay there for a few meetings," he said. "But the presumption would be, if all goes well, that the next move would be toward ... a tighter policy."
Asked about market expectations for the first Fed move to hike rates, Bullard said it would not be unreasonable to expect a tightening of U.S. monetary policy to begin some time in the winter of 2011-2012.
HIGH TIDE FOR "UBER-EASY"
With the U.S. economy still on track for recovery despite what may be a slower-than-expected first quarter, policy makers will discuss how soon and how fast to scale back the support they put in place to pull the economy out of recession, the St. Louis Fed leader told Reuters ahead of the Insider interview.
"I would see this as kind of high tide. The question is how to get the tide to recede a little bit," he said.
"The question is should you start with balance-sheet issues or should you start with interest rates, and there's definitely views on both sides of that."
Bullard is not alone in proposing bond sales to undo the stimulus the Fed deployed as the economy reeled from one of the most debilitating financial crises in U.S. history, in 2007-2009.
Philadelphia Fed President Charles Plosser, one of the most strident anti-inflation hawks on the panel, has similarly called for active measures to shrink the Fed's holdings, which have almost tripled from their pre-crisis size as the bank pumped cash into the stricken economy.
"It's going to take a long time to get back to normal," Bullard said. "There is considerable risk... If you start sooner, you may be able to go more slowly, if you start later you might have to go more rapidly."
In one of the most aggressive stimulus campaigns in history, the Fed cut interest rates to zero in December 2008, and then bought $1.7 trillion in longer-term Treasurys and mortgage-related debt. When the recovery faltered last year, it initiated $600 billion more in Treasurys buying which is due to be completed by the end of June.
With unemployment still high, and substantial spare capacity at U.S. factories, the most senior Fed officials, including chairman Ben Bernanke, have shown they are in no hurry to withdraw the support.
In that regard, the Fed stands out among major global central banks. The European Central Bank raised interest rates last week and the Bank of England has been under pressure to move next in response to inflation.
Bernanke last year indicated he favored raising rates as the first step toward the exits. But that was before the U.S. economic recovery's faltering in 2010 and he has not recently aired views on how to carry out an exit strategy.
© 2017 Thomson/Reuters. All rights reserved.