Fed cutback on bond possible

09:10, January 12, 2011      

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A member of the United States Federal Reserve's policymaking committee suggested yesterday that the Fed may need to scale back its US$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 November 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 Fed has left open the door to buying less government debt if the economy were to strengthen more than anticipated or buy more 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 January 25-26 and will review the program at that time.

In a speech delivered in Philadelphia, Plosser said 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.

Source: Shanghai Daily
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