Fed's Stein puts focus on September as time to assess QE3

By Jonathan Spicer and Alister Bull

NEW YORK/WHITE SULPHUR SPRINGS, West Virginia (Reuters) - September could be an opportune time for the Federal Reserve to consider scaling back its assets purchase, an influential official of the U.S. central bank said on Friday, though he said the Fed must take a long view of economic progress and not be blinded by the most recent data.

The remarks by Fed Governor Jeremy Stein drew the attention of economists and investors after he ticked off several examples of improvement in the labor market since the Fed launched its bond-buying program last September.

Stein's speech, and a separate one on Friday by Jeffrey Lacker, president of the Richmond Fed, had some parallels to efforts by other Fed officials earlier this week to soothe market anxieties about a pullback in the bond purchases. Nonetheless, the two officials showed a more aggressive tone on when the central bank's unprecedented policy accommodation might be reduced.

The Fed's purchase of Treasuries and mortgage bonds at a monthly pace of $85 billion has provided a huge flow of liquidity into financial markets, driving up assets from stocks to bonds.

Yields on the benchmark 10-year Treasury note rose after Stein's remarks, a sharp reversal of stabilization in the market earlier in the day.

Markets had dropped hard in the days after Fed Chairman Ben Bernanke last week said the Fed expected to pare back on its bond purchases, known as quantitative easing, later this year and to halt it altogether by mid-2014, as long as the economy progresses as expected.

But Stein on Friday, in an unusual move, trained investors' attention on the Fed's September policy meeting, though the policy-setting Federal Open Market Committee will also meet in July.

"The best approach is for the committee to be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting - as salient as these releases may appear to be to market participants," said Stein, who is a voting member of the policy committee.

Data from early September "will remain relevant for future decisions," even if it does not play a primary role in any policy decision in September, he said, in a speech at the Council on Foreign Relations in New York.

"If the news is bad, and it is confirmed by further bad news in October and November, this would suggest that the 7 percent unemployment goal is likely to be further away, and the remainder of the program would be extended accordingly," he said.

Stein's remarks drew a sharp reaction on expectations of the Fed's policy path.

"Stein's remarks cannot be lightly dismissed and raise risks that some on the committee may have already essentially decided on September," Michael Feroli, JPMorgan's chief U.S. economist, said.

Thomas Simons, an economist at Jefferies, also found significance in Stein's reference to the September policy meeting, saying that it "suggests that he is eyeing September for making a decision about changing the pace of purchases."

EXPECT MORE VOLATILITY

Lacker, one of the central bank's most hawkish officials, who is not a voter on policy this year, said it had been "wise" for Bernanke to clarify the Fed's views on future bond buying, but stressed policy would still be loose as the Fed reduces "the pace at which it is adding accommodation."

Financial markets should brace for more volatility as they digest news of a reduction in quantitative easing, he said.

"This type of volatility is a normal part of the process of incorporating new information into financial asset prices and should not interfere with the moderate-growth scenario that I have presented," Lacker told a judicial conference in West Virginia.

The Fed's policy measures, including keeping low interest rates near zero percent since late 2008 and the bond purchases, are meant to boost spending, investment, hiring and overall growth, which in the first quarter of this year was a below-average 1.8 percent annual rate.

On the labor market, where unemployment remains high at 7.6 percent, Stein noted the rate was 8.1 percent when the bond purchase program was launched last year. Monthly job growth has jumped dramatically since then, he said, adding Fed forecasts are also more optimistic.

Stein said the Fed can be more specific about its plans for QE3 as it approaches its policy goals. The timeline Bernanke articulated illustrates a "greater willingness to spell out what the committee is looking for, as opposed to a 'we'll know it when we see it' approach," he said.

Still, Stein stressed that reducing the pace of QE3 is highly conditional on the economy. He added it did not mark a change in policy and was meant only to clarify things for investors.

Stein, a relatively new but highly respected member of the powerful Fed board, turned some heads back in February when he warned the massive asset purchases were showing signs of inflating price bubbles in junk bonds and other markets.

But on Friday he said while financial stability should play a roll in monetary policy decisions, the benefits of QE3 have surpassed the costs of the program, including such stability risks.

(Reporting by Jonathan Spicer and Alister Bull; Editing by Leslie Adler)

Source: http://news.yahoo.com/feds-stein-puts-focus-september-time-assess-qe3-161413098.html

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