The Federal Reserve could halt its asset purchases this year, two top Fed officials suggested on Friday, a view also gaining traction among economists at Wall Street's top financial institutions.
St. Louis Fed President James Bullard, a voting member of the Fed's monetary policy panel in 2013, 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.
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That's the bar for the Fed's policy-setting committee to halt the current round of asset purchases that it began in September. The Fed is currently buying $40 billion in mortgage-backed securities and $45 billion in Treasuries each month in a bid to push down borrowing costs and spark faster growth.
"If we get even moderately good growth this year I would expect unemployment to continue to tick down," Bullard later told reporters. "I would say that that would put the committee in a good position to think about doing a pause with the balance sheet policy."
Bullard also acknowledged that he had a more optimistic view on unemployment than some other Fed officials, and sees it in the "low 7's" by year-end.
Thousands of economists have gathered in San Diego for the annual American Economic Association meeting, drawing some of the biggest names in the profession as well as top policymakers.
Bullard stressed that the Fed would decide about changing its bond-buying program on the basis of the outlook for the labor market, and said that if it decided to pause, and then saw conditions weaken, it might resume the purchases.
The Fed has also promised to keep interest rates at their current near-zero level until unemployment drops to 6.5 percent, as long as inflation does not threaten to rise above 2.5 percent.
Philadelphia Fed Bank President Charles Plosser, who spoke separately at the conference, said he expects unemployment to drop to between 6.8 percent and 7.0 percent by the end of 2013.
As a result, he hopes the Fed will stop buying bonds before the 6.5 percent threshold, implying he anticipates the asset purchases could halt this year. Unemployment registered 7.8 percent last month.
Economists at nine of 16 primary dealers -- the large financial institutions that do business directly with the Fed -- told Reuters on Friday they expect the Fed to end its Treasuries purchases in 2013.
Fed policymakers are increasingly concerned about the impact of their monthly purchases, which currently total $85 billion.
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.
Meanwhile, another top Fed official warned the U.S. central bank's aggressive easing plan threatens the Fed's credibility.
Jeffrey Lacker, president of the Richmond Fed, 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 dissented on all Fed easing moves last year, told a meeting of the Maryland Bankers Association.
The U.S. economy expanded 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.
"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.
Bullard, speaking on a panel in San Diego, warned that central bankers, in fighting to stabilize financial markets, have sacrificed some of their cherished independence, an attribute many Fed historians and policymakers argue is key to keeping inflation under control.
Bullard singled out the European Central Bank as one of the worst offenders, but warned more broadly about the "creeping politicization" of central banking globally -- something that he said would deliver disappointing economic results.
EYEING 7.1 PERCENT UNEMPLOYMENT
While Lacker and Plosser are outspoken policy hawks, Bullard is more of a centrist who is nonetheless toward the hawkish end of the spectrum of Fed officials. The three were the first top central bank officials to speak publicly since the minutes were unveiled on Thursday.
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.
Government data released on Friday showed 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.
Fed Vice Chair Janet Yellen, a proponent of aggressive Fed easing, also spoke at the conference on Friday, but confined her comments to how regulators are tackling risks to financial stability.
(Additional reporting by Jonathan Spicer, Chris Reese and Herb Lash in New York and Pedro Nicolaci da Costa in Baltimore; Editing by Chizu Nomiyama, David Gregorio, Carol Bishopric and Lisa Shumaker)