The Federal Reserve must be patient in deciding when to scale back bond purchases, top officials said on Friday, with one arguing it could wait "years" to lift interest rates and another suggesting it could tolerate inflation rising to 3 per cent.
The dovish remarks, by Chicago Fed President Charles Evans, Minneapolis Fed chief Narayana Kocherlakota and New York Fed boss William Dudley, came as investors reviewed expectations on whether the Fed will begin to taper bond buying this year or next, after it unexpectedly decided last week to stand pat.
Evans, speaking in Oslo, said the economic outlook suggested that a reduction in the level of bond purchases was in order, but that when to begin that process is not yet certain.
"Whether or not we'll have enough confidence at the October meeting or the December meeting, I just can't say that with a lot of certainty," he told reporters. "I think there's a decent chance of that. But it could go a little bit longer," he said.
Financial markets were stunned when the Fed's policy-setting committee announced at the end of its meeting last week that it would keep buying bonds at a monthly pace of $85 billion.
Kocherlakota, in an interview with Reuters, said the volatility in financial markets following the policy decision, which sparked complaints the central bank had failed to communicate properly, exposed the need for the Fed to re-think how it guides expectations.
"What went wrong is the fact that we don't have a comprehensive strategy in place that is credible. ... We do not have a comprehensive form of forward guidance."
WHATEVER IT TAKES
Kocherlakota said the Fed should do "whatever it takes" to achieve its goal of maximum sustainable employment.
"If that announcement is credible, (it) has enormous power in and of itself," said Kocherlakota, who does not vote on Fed policy in 2013.
The Fed launched its third round of so-called quantitative easing, or QE3, in September, and said it would keep buying bonds until it saw a substantial improvement in the outlook for the labor market.
The jobless rate has since declined to 7.3 per cent in August versus 8.1 per cent a year ago. But it is still historically high and even the drop in August was attributed to the many discouraged job-seekers who have given up looking for work.
Kocherlakota said scaling back the purchase program last week would have sent the wrong message to markets - that the Fed