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Fed, ECB policymakers urge policy normalization

By Mark Felsenthal

ST. LOUIS (Reuters) - Top U.S. and European central bank officials agreed on Wednesday their institutions must withdraw some of the extraordinary support they provided to help their economies recover from a deep crisis.

"The economy has come in stronger than we anticipated at the time of the November decision to embark on (a $600 billion bond buying program)," St. Louis Federal Reserve Bank President James Bullard told reporters. "My own thoughts and the thoughts of the committee will naturally turn toward ... exit strategy."

Speaking at the same media conference, a top European central banker said improvements in the euro zone suggest a need to continue steps to steer monetary policy away from its ultra-supportive path.

"With the economy doing much better and with financial markets improving, actually the stance of monetary policy has become more expansionary," ECB Governing Council member Axel Weber said.

"If these trends continue, further policy normalization is warranted," he said.

The policymakers spoke to media before a speech by Weber.

ECB AHEAD OF FED

The Fed is on track to complete its bond buying by the end of June, and Fed Chairman Ben Bernanke has given no sign the central bank will begin tightening policy any time soon.

Nevertheless, the views of Bullard, seen at the center of the spectrum of opinions on the Fed, suggest that pressure is building within the institution to tighten financial conditions.

In that regard, the Fed has lagged the ECB, which raised interest rates to 1.25 percent last week, bringing to an end almost two years of record low rates and kicking off what is expected to be a steady series of hikes.

Financial markets are currently pricing in that the bank will raise rates again to 1.5 percent in either June or July.

The Fed engaged in one of the most extensive central bank rescue missions on record, cutting short-term rates to near zero in December 2008. The U.S. central bank bought $1.7 trillion in longer-term mortgage-related and Treasury securities in 2009-2010 before launching a renewed round of bond buying last November.

Weber said how many more ECB rate moves are in store depends on how economic developments play out.

"The overall outcome for the euro area ... is unclear at this point, and we would be wise to look at the data coming in," he said. "But if things continue along our projections, which is our working hypothesis, then I think some further policy normalization this year is warranted," Weber said.

Bullard is not a voter on the Fed's policy-setting panel this year.

TIME TO WITHDRAW BANK AID

Weber, who plans to step down from the ECB May 1, said the central bank should continue to pull back on extraordinary measures to help a banking system that is steadily improving.

"Unlimited provision of central bank liquidity to banks without a sustainable business model cannot be a long-run solution," Weber said in a speech at the St. Louis Fed.

"Monetary policy should not and cannot persistently replace the repair of banks' balance sheets. The phasing out of non-standard measures has to be continued," he said.

Monetary policy with too short a time horizon could lead policymakers to miss key signals of oncoming trouble. He added that more targeted tools such as bank capital requirements, rather than the "blunt" tool of interest rates, should be used to deal with any such imbalances.

"The objective of financial stability requires its own, macroprudential set of tools, whereas maintaining price stability should remain the primary objective of monetary policy," Weber said.

(Additional reporting by Pedro Nicolaci da Costa in Washington; Editing by Dan Grebler and Jan Paschal)

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