New Fed member thinks bond program could 'backfire'

/ Source: The Associated Press

A member of the Federal Reserve's policymaking committee suggested Tuesday that the Fed may need to scale back its $600 billion Treasury bond-buying program if the economy grows more quickly than expected.

But Charles Plosser, who becomes a voting member this year, is unlikely to sway the other members, based on speeches and minutes from the Fed's last meeting.

Plosser, president of the Federal Reserve Bank of Philadelphia, worries that the Fed's program may soon "backfire on us" and spur inflation if "we don't begin to gradually reverse course."

Plosser has repeatedly spoken out against the bond-buying program. He has raised concerns that the risks — namely the potential for unleashing inflation — could outweigh any benefits to the economy. Plosser was not a voting member when the Fed adopted the program on Nov. 3, although he attended the meeting. Only five of the 12 regional presidents get a vote.

The regional bank president, who has been outspoken with his concerns about inflation, is likely to put pressure on Federal Reserve Chairman Ben Bernanke and his colleagues to shrink the program.

The Federal Reserve has left open the door to buying less government debt if the economy were to strengthen more than anticipated or buy less were if to weaken.

However, minutes of the Fed's December meeting said the central bank has a "fairly high threshold for making changes to the program." Bernanke defended the bond-buying effort and offered no signals that any changes would be forthcoming, while testifying on Capitol Hill last week.

The Fed meets next on Jan. 25-26 and will review the program at that time.

In a speech delivered in Philadelphia, Plosser said that a "slow but sustainable economic recovery is under way." He predicted the economy would log annual growth in the range of 3 to 3.5 percent over the next two years.

That would mark an improvement from the projected 2.8 percent growth for 2010. But the pace won't be fast enough to make a noticeable dent in the nation's 9.4 percent unemployment rate, Plosser acknowledged.

Plosser said the Fed will probably have to start boosting interest rates, now at a record low near zero, before the unemployment rate has dropped to an "acceptable level." The Fed has held its key interest rates at a record low since December 2008 to help prop up the economy.

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, defended the Fed's efforts to strengthen the economy, including the bond-buying program, during a speech Tuesday to Wisconsin bankers.

Kocherlakota predicted that economic growth this year will be closer to 3 percent and that the unemployment rate is likely to be higher than 8 percent at the end of 2012. He also will be a voting member this year on the Fed's policymaking panel.

Separately, the Fed's regional banks in Dallas and Kansas City on two occasions late last year requested that the Fed increase the rate charged to banks for emergency loans. The Fed rejected the requests, citing a still-fragile economy, according to a document released Tuesday.

With the financial crisis over, the two banks argued that the rate should be increased by one-quarter percentage point. They made the requests in November and December.

Richard Fisher, president of the Dallas Fed, becomes a voting member this year and has been critical of the bond-buying program. Thomas Hoenig, president of the Kansas City Fed, was a voting member last year and opposed the Fed's bond-buying program.