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Now! wait! Fed still divided but hey, that's 'healthy'

Charles Plosser, president of the Federal Reserve Bank of Philadelphia.
Sam Hodgson | Bloomberg | Getty Images
Charles Plosser, president of the Federal Reserve Bank of Philadelphia.

The latest speeches from Federal Reserve officials show policy makers still remain divided on what to do.

Philadelphia Fed President Charles Plosser said the Fed should start reducing the size of its "quantitative easing" bond-buying program and stop its purchases completely by the end of the year.

In a speech at a conference in Jackson Hole, Wyo., Plosser said, "It is time to exit from the asset purchase program in a gradual and predictable manner."

He also argued the Fed should commit to tightening policy when the unemployment rate falls to a 6.5-percent "trigger" level.

Plosser's proposal appears to run against the grain of most other U.S. monetary policy makers, who have increasingly stressed that interest rates could well stay near zero well after the U.S. jobless rate hits that level.

Meanwhile, St. Louis Fed President James Bullard said the substantial rise in bond yields since last month is not justified by an improvement in U.S. economic data or a rise in inflation, warning it reflects optimism that may prove to be too rosy.

"Recent FOMC (Federal Open Market Committee) decisions have met with a substantial rise in Treasury yields, and I have suggested that a possible justification for the rise in yields is increased optimism concerning future U.S. macroeconomic performance," Bullard said in prepared remarks.

"However, given recent forecasting performance, we should be careful in using an optimistic forecast to justify current policy decisions. A more prudent approach would be to wait to see if better macroeconomic outcomes materialize in the months and quarters ahead," he said at the same conference Plosser addressed.

Stocks were little changed after the Fed officials' remarks. Click here for the latest on the markets.

Perhaps the San Francisco Fed President John Williams summed it up, saying he thinks divergent views among policy makers at the Fed is "healthy."

Williams said he fully supports Fed Chairman Ben Bernanke's road map for ending the $85 billion a month program of bond buying by mid-2014, even though a few months ago Williams said he would want to bring the program to close by the end of the year.

Lower-than-expected inflation helped convince him to make that "small shift" in his policy view, Williams said, adding that exactly when the Fed ends the bond buying program is not as important as making sure the high unemployment rate comes down and undesirably low inflation rises back to the Fed's 2 percent target.

Minutes of the most recent meeting showed that about half of the Fed's 19 policy makers wanted quantitative easing to end this year.

Bullard is a voting member of the FOMC, while Plosser and Williams are not. Plosser will be a voting member in 2014 and Williams will be a voting member in 2015.

The Fed has held its key federal-funds rate at rock bottom since late 2008 to help boost hiring and drag the economy from the Great Recession. Unemployment was 7.6 percent last month.

To clarify its future intentions and to give the economy even more support, the policy-making Federal Open Market Committee said in December the Fed would keep rates that low until unemployment falls to 6.5 percent, as long as inflation expectations do not rise above 2.5 percent.

Plosser said these so-called "thresholds," while an improvement, still leave too much room for interpretation. The Fed should "commit to its forward guidance" by treating those levels as "triggers rather than thresholds," he said.

The "FOMC has offered a variety of changing targets or signals about future behavior," he said in prepared remarks to the 5th Annual Rocky Mountain Economic Summit.

"Although the aim was to clarify our policy intentions, I believe the repeated changes have likely caused more confusion than illumination," he told the conference hosted by the Global Interdependence Center.

The proposal may be a long shot, since influential officials have recently stressed the Fed is in no rush to raise rates.

On Wednesday, Fed Chairman Ben Bernanke renewed his message that the U.S. central bank's policy would remain "highly accommodative" and rates could well stay low even after the jobless rate falls below the threshold. "There will not be an automatic increase in interest rates when unemployment hits 6.5 percent," he said.

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