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Fed officials say easing policy can be calibrated

By Emily Flitter and David Lawder

ROCHESTER, N.Y./WASHINGTON (Reuters) - The U.S. Federal Reserve's controversial $600 billion bond buying program is subject to regular review and can be adjusted if needed, top Fed officials said on Thursday.

Still, the central bank as a whole shows little inclination to curtail the purchases unless the economy accelerates rapidly, since it continues to undershoot its mandated goals on both inflation and employment.

Philadelphia Fed President Charles Plosser, a known inflation hawk, said he remained skeptical the asset purchases would do much to lift the economy and the central bank might need to stop short of buying the full $600 billion if economic growth exceeded expectations.

However, Sandra Pianalto of the Cleveland Fed said the frail recovery required the latest round of support from the monetary authorities.

"Our policy action offers the right kind of insurance that the Federal Reserve's monetary policy will support the economic expansion while stabilizing inflation and inflation expectations consistent with our price stability mandate," Pianalto said.

Her counterpart at the St. Louis Fed, James Bullard, was also optimistic that bond buying would work, but added he had not supported setting the $600 billion figure in advance.

He called that number "forward guidance," which could be adjusted based on economic data, and said he would have preferred the Fed make determinations on the size of asset purchases from meeting to meeting.

The U.S. economy grew at just a 2 percent annualized rate in the third quarter. Fed officials say that is not enough to bring down the nation's unemployment rate, which has been stuck near 9.6 percent for several months.

Plosser, speaking at an economic seminar in Rochester, New York, said if bond buying did not deliver the hoped-for economic benefits, he would "not infer that we merely need to increase the size of the program."

Instead, that would be a signal for the Fed to rethink its analysis of the program's costs and benefits.

"If the economy grows more quickly than I currently anticipate, the purchase program will need to be reconsidered and perhaps curtailed before the full $600 billion in purchases is completed," Plosser said.

Pianalto's comments, however, suggested the bar would be quite high. She said that while deflation was unlikely, the recent trend of declining inflation was worrying in its own right.

The core of the Federal Open Market Committee, centered around its chairman Ben Bernanke, has repeatedly indicated that it thinks the $600 billion figure is appropriate.

Some of the Fed's more dovish members, including the New York and Chicago Fed presidents, have indicated an even larger sum might be needed.

NO "POLITBURO"

The asset-buying program, announced last month, has drawn complaints at home and abroad. Critics worry it will weaken the dollar, spawn asset bubbles and inflation overseas, while doing little to help the U.S. economy.

Bullard, however, said dollar depreciation was a "normal by-product" of easier monetary policy and other countries had systems in place that can adjust to changes in U.S. policy.

He also said there had been criticism of the asset buying program within the Fed as well, which he called "healthy debate" around a difficult decision.

"We should not be the Politburo and we should not be indecipherable," he told reporters after speaking to economists in Washington. "I think if there is some dissent within the committee, I think markets should be aware of that and they can factor in where the committee might go in the future."

That view was not universal, however, with some officials concerned that too wide a divergence of views might thwart the policy's effectiveness by unduly paring back market expectations.

In a fresh sign that the Fed will be stepping up its communication efforts, television network CBS announced Bernanke will appear on its popular news show 60 Minutes on Sunday.

The Fed holds its next policy-setting meeting on December 14, which will be the last one of the year. Bullard is currently a voting member on the Fed's policy-setting committee but rotates out next year. Plosser will be a voting member next year.

When asked how he will vote on continuing the asset purchases in 2011, Plosser replied, "Since I don't know how the economy is going to evolve then, I'll have to wait and see."

"HUE AND CRY"

Plosser has a reputation as an inflation "hawk" and regularly expresses concern that the central bank's swollen balance sheet could provide the kindling for a dangerous spike in price pressures.

He reiterated on Thursday the latest round of asset purchases -- often referred to as "QE2" -- will complicate the Fed's eventual return to a normal monetary policy stance.

"Because the Fed's monetary policy must be forward looking, the hue and cry from many quarters may be quite loud when it is time to act," he said. "Even with the best of intentions, if we don't act aggressively and promptly, we may find ourselves behind the curve and at risk for substantial inflation."

Bullard, considered more of a centrist, said inflation concerns were "legitimate and important" but disinflation was more worrisome right now.

On a busy day for Fed speakers, Fed Governor Elizabeth Duke did not wade into the asset-buying debate, limiting her remarks to the state of consumer credit.

Later on Thursday, Cleveland Fed President Sandra Pianalto is scheduled to speak on current economic and monetary policy issues at a college in Ohio.

(Additional reporting by Maria Aspan in Philadelphia, Marsha Lynn Bragg in Oberlin, Ohio; Writing by Emily Kaiser and Pedro da Costa;Editing by Tomasz Janowski)

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