By Jonathan Spicer, Luciana Lopez and Ann Saphir
NEW YORK/SAN ANTONIO (Reuters) - The Federal Reserve must for now continue to push hard against threats to the U.S. recovery, but should still be able to reduce its support for the economy later this year, an influential central bank policymaker said on Monday.
In a strong defense of the Fed's shock decision last week to keep buying bonds unabated, New York Fed President William Dudley warned in a speech that fiscal uncertainties "loom very large" as Congress prepares to hash out a deal to avoid a government shutdown and raise the nation's debt ceiling.
At a separate New York event, Atlanta Fed President Dennis Lockhart likewise warned that America risked "losing its economic mojo" unless lawmakers worked to reverse declines in labor productivity and new job creation.
In San Antonio, the hawkish chief of the Dallas Fed, Richard Fisher, told reporters that he had pushed for the Fed to reduce its monthly purchases by $10 billion, and warned that by standing pat the Fed had hurt its credibility.
Last week, investors were stunned when the Fed decided not to reduce its asset purchases from the current $85-billion monthly pace, sparking a global stock rally. The decision prompted criticism that policymakers got cold feet despite improving employment and economic growth, and that they misled investors.
But Dudley, a close ally of Fed Chairman Ben Bernanke, highlighted drags from the sharp recent rise in longer-term interest rates, higher taxes and lower public spending adopted earlier this year, as well as growing questions over the debt limit and government funding.
"We must push against these headwinds forcefully to best achieve our objectives," Dudley, a consistent policy dove and a permanent voting member of the central bank's monetary policy committee, said at Fordham University.
Stocks and bonds surged and the U.S. dollar dropped last week after the Fed's policy decision.
Many economists wondered whether Bernanke had backpedaled from a plan that he articulated in June in which the Fed aimed to reduce the purchases later this year and to halt the quantitative easing (QE) program altogether by mid-2014, as long as the U.S. economy keeps improving.
Dudley said on Monday that framework "is still very much intact." He noted that, back in June, Bernanke did not specify the first reduction to QE would come in September, and that it would be dependent on economic data.
Any reduction in QE must be based on the most recent measures of economic health, Dudley said, arguing that two requirements have not yet been met: evidence the labor market has improved and confidence that those gains will continue.
"I'd like to see economic news that makes me more confident that we will see continued improvement in the labor market," Dudley said. "Then I would feel comfortable that the time had come to cut the pace of asset purchases."
Michael Feroli, an economist at JPMorgan, said Dudley's speech hinted at "new QE goalposts" that focus somewhat more on gross domestic product growth.
At the least, Dudley appeared ready to wait until after Democrats and Republicans in Congress worked through budget questions that threatened to shut down government on October 1. The politicians began debate on this Monday.
Investors keyed in on Dudley's remarks but for different reasons on Monday. Stocks fell after Dudley suggested the pace of QE could be reduced later this year, and they stayed lower through the day. But bond prices rose as that market focused in part on his strong support for battling economic headwinds.
LABOR MARKET STILL THE FOCUS
The U.S. jobless rate has fallen to 7.3 percent as of last month from 8.1 percent a year earlier. But Dudley said that drop masks much more modest improvement in hiring, job openings, quitting rates and the vacancy-to-unemployment ratio.
Changes to the asset-purchases "need to be anchored in an assessment of how the economy is actually performing, how financial conditions are evolving, and how this affects the longer-term outlook and the risks around it," he said.
Dudley's dovish speech appeared to push back on those, including some within the Fed, who point to broader economic progress since the third round of quantitative easing was launched a year ago, rather than sometimes poor monthly data.
Dallas Fed's Fisher, a longtime opponent of the bond-buying program, is one of those inside the Fed who disagreed with the decision.
"Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question," Fisher said he told his colleagues at the Fed's policy-setting meeting last week.
"I believe that is exactly what has occurred, though I take no pleasure in saying so," Fisher said.
Fisher, who does not vote on the Fed's policy-setting panel this year, said the vote of 11 to 1 to continue to buy $45 billion in Treasuries and $40 billion in mortgage-backed securities did not reflect the "close and tough" decision he and his colleagues made.
He said he supported a reduction to the Fed's purchases of Treasuries but not those of mortgage-backed securities because he has been seeing some "tenderness" in housing. While purchases of Treasuries, he said, have not encouraged businesses to hire, MBS purchases have helped the housing market, he said.
Fisher saved some of his harshest criticism for the White House, which is in the process of picking a successor to Bernanke and whose top pick, former Treasury Secretary Lawrence Summers, withdrew from consideration for Fed chair after the very possibility of his nomination drew tremendous opposition from within President Barack Obama's own Democratic Party.
"The White House has mishandled this terribly," Fisher said. "This should not be a public debate."
Lockhart, a centrist who also does not vote on the Fed's policy committee this year, said the nation's labor market had still not recovered.
"We've made a lot of progress, but there's a way to go before the Fed can claim that the maximum employment objective has been achieved," he said, referring to the central bank's dual mandate from Congress, which also includes price stability.
Lockhart did not comment specifically on last week's policy decision. But he said monetary policy could aid economic dynamism by fostering favorable interest rates, provided that was "in a context of low and stable inflation."
But he made clear that the central bank could only do so much, and the rest would be up to other public officials to come up with ways to improve the economic climate.
"Is America losing its economic mojo?" Lockhart asked. "There is some evidence to the affirmative."
(Additional reporting by Alister Bull in Washington; Editing by Chizu Nomiyama)