By Jonathan Spicer and Pedro da Costa
NEW YORK/BALTIMORE (Reuters) - The Federal Reserve could be in a position to halt its asset purchases this year if the U.S. economy improves, a top Fed official said on Friday, while another warned the aggressive easing plan threatens the central bank's credibility.
St. Louis Fed President James Bullard, a voting member of the Fed's monetary policy panel this year, said a drop in the unemployment rate to 7.1 percent would probably constitute the "substantial improvement" in the labor market that the central bank seeks.
"If the economy performs well in 2013, the Committee will be in a position to think about going on pause" with the asset buys, Bullard said on CNBC TV. "If it doesn't do very well then the balance sheet policy will probably continue into 2014."
U.S. unemployment stood at 7.8 percent last month. While that is down from a year ago, and while there are positive signs that the housing and manufacturing sectors are picking up, the monthly rate of job growth is probably not enough to ratchet down unemployment much more.
Meanwhile, Fed policymakers are increasingly concerned about the impact their monthly purchases of $85-billion in longer-term bonds and mortgage securities are having on financial markets.
Minutes from their December policy meeting showed that "several" top officials expected to slow or stop the so-called quantitative easing program, dubbed QE3, "well before" the end of the year - news that surprised some on Wall Street and prompted a drop in stocks and bonds, and a rise in the dollar.
Jeffrey Lacker, president of the Richmond Fed bank, on Friday held his ground opposing QE3, arguing that continued monetary policy is not the appropriate way to tackle the problem.
"It is unlikely that the Federal Reserve can push real growth rates materially higher than they otherwise would be, on a sustained basis," Lacker, who voted on Fed policy last year, told a meeting of the Maryland Bankers Association.
"I see an increased risk, given the course the committee has set, that inflation pressures emerge and are not thwarted in a timely way," he said.
EYEING 7.1 PERCENT UNEMPLOYMENT
While Lacker is an outspoken policy hawk, Bullard is more of a centrist who is nonetheless toward the hawkish end of the spectrum of Fed policymakers. The pair were the first top central bank officials to speak publicly since the minutes were unveiled on Thursday.
Bullard said he expects unemployment to "continue to tick down through 2013," adding the Fed could ramp down the asset purchases if the jobless rate drops to 7.1 percent.
"That would be probably substantial improvement and the committee could think about removing accommodation on the balance sheet side of the policy at that point," he said.
After the December meeting, the Fed said it would continue buying bonds until the labor market outlook improves "substantially," which Fed Chairman Ben Bernanke has characterized as a "sustained" decline in the unemployment rate.
With the Fed's key interest rate having remained near zero since late 2008 to encourage economic recovery from the Great Recession, the bond purchases are meant to lower longer-term rates and to encourage investment and hiring in the broader economy.
The U.S. economy expanded a respectable 3.1 percent in the third quarter on an annualized basis, but growth is believed to have slowed sharply to barely above 1.0 percent in the last three months of the year.
Government data released Friday show that the U.S. jobless rate held steady from November to December. Bullard called the December jobs number - a boost of 155,000 in new non-farm jobs - "reasonably good.
A few more Fed policymakers are due to speak later on Friday.
(This story is refiled to show Lacker is president of Richmond Fed)
(Reporting by Jonathan Spicer and Pedro Nicolaci da Costa; Additional reporting by Herb Lash; Editing by Chizu Nomiyama)
(c) Copyright Thomson Reuters 2013. Check for restrictions at: http://about.reuters.com/fulllegal.asp