In its most detailed survey so far of the dramatic measures taken to counter the damage from the 2007-2009 financial crisis, International Monetary Fund staff repeated earlier assessments that the steps had worked but face diminishing returns.

However, in new research, they also said central banks could face severe losses when they begin to withdraw the extraordinary sums of money they have pumped into financial systems around the world.

Massive market bets are riding on whether the U.S. Federal Reserve and its peers can execute a graceful withdrawal from more than four years of ultra-easy monetary policy, which helped restore confidence in global growth.

Central banks have pumped trillions of dollars, euro and yen into the global economy through bond-buying campaigns after interest rates were slashed close to zero.

The ultra easy monetary policies have promoted critics to warn of the risk of inflation and asset price bubbles, while some developing nations have argued their richer counterparts were seeking to gain an export edge by lowering the value of their currencies.

Jaime Caruana, head of the Bank for International Settlements, warned on Thursday that big central banks should not delay in winding in their economic support programs. The BIS advises global central banks.

But the IMF found the benefits of unconventional measures still outweighed the potential costs in the United States and Japan, and it reserved its toughest language for politicians who fail to undertake long-overdue economic reforms.

“A key concern is that monetary policy is called on to do too much, and that the breathing space it offers is not used to engage in needed fiscal, structural, and financial sector reforms,” the IMF said in the report.

“These reforms are essential to ensuring macroeconomic stability and entrenching the recovery, eventually allowing for the unwinding of unconventional monetary policies,” it said.

FRIEND OR FOE

The IMF did, however, find evidence to support the claims of central bank critics that keeping interest rates ultra-low for so long risks future inflation and asset bubbles, with the bond-buying exposing the institutions to potentially steep losses.

It looked at the Fed, Bank of Japan and Bank of England and found all three would face balance sheet losses if they had to sell bonds to quickly shrink their balance sheets.

Losses can also stack up if central banks have to pay interest on excess reserves if those payments exceed earnings from assets held by the central banks. They might want to pay interest to soak up the excess funds so they do not flood into credit markets and cause inflationary stress.

The Fed has tripled its balance sheet to more than $3 trillion through three waves of bond buying and the Bank of Japan surprised markets last month declaring it would drive inflation up to 2.0 percent through asset purchases.

The Bank of England has bought bonds worth 375 billion pounds ($575 billion) so far but opted to not increase that amount when it reviewed policy on May 9.

Under a worst-case scenario, the IMF said losses could top 7.0 percent of GDP for the BOJ, nearly 6.0 percent of GDP for the BOE, and more than 4.0 percent at the Fed. But it stressed that any losses would be mainly a political problem and would not hurt the real economy or prevent the central bank from doing its job.

“Absent actual or feared political interference, however, central bank losses and the size of balance sheets should not constrain the implementation of monetary policy,” it said.

SPILLOVERS

Another source of danger lies in the cross-border spillovers of ultra-easy monetary policies that encourage investors to pour capital into higher-yielding emerging markets.

IMF staff acknowledged the risk, but said that so far there was no clear evidence that the costs from spillovers outweighed the benefits of stronger global growth resulting from actions by central banks in advanced economies.

“Thus far, capital flows to emerging markets have been ample, but not alarming,” the report noted. “While a number of factors such as high commodity prices and growth imply that these flows could be structural, legitimate concerns about a sudden change in global market sentiment remain.”

That said, emerging market authorities can help offset the potential impact of fickle capital inflows, including by introducing caps on how much capital can enter. International policy coordination could also help.

“Outcomes could be improved if policymakers in source countries take into account how their policies affect global economic and financial stability. Greater attention to the cross-border coordination of policies would also help,” it said.

(Reporting By Alister Bull; Editing by Andrea Ricci and Leslie Gevirtz)

In the most detailed survey so far of the dramatic measures
undertaken to counter the 2007-2009 global financial crisis,
International Monetary Fund staff repeated earlier assessments
that the steps had worked, but face diminishing returns.

However, in new work undertaken to answer a question that
remains controversial in many countries, including the United
States where the Federal Reserve was in the eye of the storm, it
also outlined scenarios where losses on exit could be severe.

Central bankers have pumped trillions of dollars, euro and
yen into the global economy through bond buying campaigns to
spur growth after interest rates were slashed close to zero,
prompting critics to warn of future inflation.

But the IMF reserved its toughest language for politicians
who fail to make use of the opportunity won by ultra-easy policy
to undertake long-overdue reforms.

“A key concern is that monetary policy is called on to do
too much, and that the breathing space it offers is not used to
engage in needed fiscal, structural, and financial sector
reforms,” the IMF said in the report.

“These reforms are essential to ensuring macroeconomic
stability and entrenching the recovery, eventually allowing for
the unwinding of unconventional monetary policies,” it said.

Central bank critics claim that keeping rates ultra-low for
more than four years risks future inflation and fanning the next
asset bubble, while exposing the institutions to steep losses,
and the IMF found evidence to support elements of that claim.

It looked at the Fed, Bank of Japan and Bank of England and
found all three would face balance sheet losses if they had to
sell bonds in order to quickly shrink their balance sheets, or
pay interest on excess reserves held by private banks to prevent
this flooding into credit markets and fanning a bubble.

The Fed has tripled its balance sheet to over $3 trillion
through three waves of bond buying and the Bank of Japan
surprised markets last month declaring it would drive inflation
up to 2 percent through asset purchases.

The Bank of England has bought bonds worth 375 billion
pounds ($575 billion) so far but opted to not increase that
amount at this stage when it reviewed policy on May 9.

Under the worst-case scenario that the IMF examined, losses
could top 7 percent of GDP for the BOJ, nearly 6 percent of GDP
for the BOE, and more than 4 percent at the Fed. But the IMF
stressed losses were mainly a political problem and would not
hurt the real economy or prevent the central bank from doing its
job.

“Absent actual or feared political interference, however,
central bank losses and the size of balance sheets should not
constrain the implementation of monetary policy,” it said.

Another source of danger lies in the cross-border spillovers
of ultra-easy monetary policies that encourage investors to pour
capital into higher-yielding emerging markets.

IMF staff acknowledged the risk, but said that so far there
was no clear evidence that the costs from spillovers outweighed
the benefits of stronger global growth resulting from actions by
central banks in advanced economies.

“Thus far, capital flows to emerging markets have been
ample, but not alarming,” the report noted. “While a number of
factors such as high commodity prices and growth imply that
these flows could be structural, legitimate concerns about a
sudden change in global market sentiment remain.”

The findings of its quarterly senior loan officers survey,
which provides a detailed dispatch from the front lines of the
U.S. economy, were broadly in line with other indicators showing
steady, but still gradual U.S. growth.

“The survey results generally indicated that banks’ policies
regarding lending to businesses eased over the past three months
and demand increased, on balance,” it said. “Banks that eased
their C&I (commercial and industrial) lending policies generally
cited increased competition for such loans as an important
reason for having done so.”

The report was based on an opinion poll of 68 domestic banks
and 21 U.S. branches and agencies of foreign banks.

U.S. growth picked up to a 2.5 percent annualized pace in
the first quarter, from 0.4 percent the previous three months,
while the unemployment rate edged down slightly to a still-lofty
7.5 percent last month.

The Fed has held interest rates at nearly zero since late
2008 and bought over $2.7 trillion worth of bonds to lower
long-term borrowing costs, an aggressive effort aimed at
encouraging more investment and spending.

CREDIT CRUNCH

Many small businesses have reported that credit remains hard
to find, but the latest Fed survey indicated that there had been
some progress on this front.

“In particular, a relatively large fraction of domestic
respondents reported having eased standards on C&I loans, and
moderate to large net fractions of such respondents reportedly
eased many terms on C&I loans to firms of all sizes,” it said.

The picture for household lending was more mixed, however,
with terms eased by a few domestic banks for prime mortgage
borrowers, while demand for this type of debt increased for a
fifth straight quarter.

Banks also said they had eased selected terms on auto loans,
but reported little change in the terms for credit card and
other consumer loans. Demand for auto and credit card debt
strengthened, though, over the last three months.

In addition, each quarter the Fed poses a series of separate
questions in the survey. This time around, it polled banks about
their lending standards to European banks, residential real
estate policies, and private student loans.

Significantly, the poll found little change in the
willingness of banks to lend to mortgage borrowers with FICO
credit scores in the 680-720 range – a solid credit rating on a
credit worthiness scale that goes up to 800.

Few of the banks polled said they offered private student
loans, and those that did said their policies were unchanged
from a year ago.

Banks also reported little change in their standards for
loans to European banks. A prolonged European debt crisis has
tipped the region back into recession with concerns flaring
again in recent weeks over a bailout for tiny Cyprus.

Arch-hawk Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, also acknowledged headwinds to the U.S. economy, but said he continued to expect it would grow around its trend rate of about 2 percent.

“The recent behavior of inflation has been heartening,” he said in remarks prepared for a luncheon hosted by the Richmond chapter of the Risk Management Association.

“Measures of inflation remain with ranges consistent with price stability, and the low current readings on some inflation indices are likely to be transitory,” he said.

The Fed’s preferred gauge of price pressures faced by consumers, the personal consumption expenditures index, slowed to 1.0 percent in March versus a year ago.

That was its lowest rate in 3-1/2 years and well beneath the Fed’s goal for 2 percent, spurring speculation in financial markets that the central bank might consider increasing its bond purchase program from a current rate of $85 billion a month.

In fact, the Fed spelled out in a statement issued after its policy meeting ended on Wednesday that it could increase the pace of bond buying if warranted by the outlook for prices and employment, although it did not alter its language on inflation.

It also maintained bond purchases at $85 billion a month.

Lacker noted that the PCE had averaged 1.2 percent over the last four quarters and acknowledged that was “on the low side of our recent experience.” But he said that he expected inflation to edge back toward 2 percent by next year.

UBER HAWK

Lacker is one of the most hawkish, or anti-inflation minded, officials on the Fed’s 19-member policy-setting committee, who dissented at every meeting when he was a voter last year in opposition to its aggressive policy actions.

“The Fed seems unable to improve real growth, despite striving mightily over the last few years, and further increases in the size of our balance sheet raise the risks associated with the ‘exit process’ when it’s time to withdraw stimulus. That is why I do not support the current asset purchase program.”

The Fed has tripled the size of its balance sheet and bought around $2.7 trillion worth of bonds since it began this program of so called quantitative easing in response to a severe 2007-2009 recession, and announced a third round in September. It has also held interest rates at nearly zero since late 2008.

The U.S. economy grew at a 2.5 percent annualized pace in the first quarter, up from 0.4 percent during the previous three months, and Lacker said this performance had been pretty impressive, given the headwinds confronting growth.

These included a recession in Europe and the uncertainty created by a large number of new regulations that U.S. firms must adopt, as well as a fiscal outlook which “is a mess”.

“The current course is unsustainable, and some combination of higher taxes and less spending growth is inevitable,” he said, in unusually blunt remarks for a Fed official.

(Reporting By Alister Bull; Editing by Chizu Nomiyama)

Arch-hawk Jeffrey Lacker, president of the Federal Reserve
Bank of Richmond, also acknowledged headwinds to the U.S.
economy, but said he continued to expect it would grow around
its trend rate of about 2 percent.

“The recent behavior of inflation has been heartening,” he
said in remarks prepared for a luncheon hosted by the Richmond
chapter of the Risk Management Association.

“Measures of inflation remain with ranges consistent with
price stability, and the low current readings on some inflation
indices are likely to be transitory,” he said.

The Fed’s preferred gauge of price pressures faced by
consumers, the personal consumption expenditures index, slowed
to 1.0 percent in March versus a year ago.

That was its lowest rate in 3-1/2 years and well beneath the
Fed’s goal for 2 percent, spurring speculation in financial
markets that the central bank might consider increasing its bond
purchase program from a current rate of $85 billion a month.

In fact, the Fed spelled out in a statement issued after its
policy meeting ended on Wednesday that it could increase the
pace of bond buying if warranted by the outlook for prices and
employment, although it did not alter its language on inflation.

It also maintained bond purchases at $85 billion a month.

Lacker noted that the PCE had averaged 1.2 percent over the
last four quarters and acknowledged that was “on the low side of
our recent experience.” But he said that he expected inflation
to edge back toward 2 percent by next year.

UBER HAWK

Lacker is one of the most hawkish, or anti-inflation minded,
officials on the Fed’s 19-member policy-setting committee, who
dissented at every meeting when he was a voter last year in
opposition to its aggressive policy actions.

“The Fed seems unable to improve real growth, despite
striving mightily over the last few years, and further increases
in the size of our balance sheet raise the risks associated with
the ‘exit process’ when it’s time to withdraw stimulus. That is
why I do not support the current asset purchase program.”

The Fed has tripled the size of its balance sheet and bought
around $2.7 trillion worth of bonds since it began this program
of so called quantitative easing in response to a severe
2007-2009 recession, and announced a third round in September.
It has also held interest rates at nearly zero since late 2008.

The U.S. economy grew at a 2.5 percent annualized pace in
the first quarter, up from 0.4 percent during the previous three
months, and Lacker said this performance had been pretty
impressive, given the headwinds confronting growth.

These included a recession in Europe and the uncertainty
created by a large number of new regulations that U.S. firms
must adopt, as well as a fiscal outlook which “is a mess”.

“The current course is unsustainable, and some combination
of higher taxes and less spending growth is inevitable,” he
said, in unusually blunt remarks for a Fed official.

Describing the economy as expanding moderately in a statement that largely mirrored its March decision, Fed officials cited continued improvement in labor market conditions.

But they reiterated that unemployment is still too high for policymakers’ comfort, reinforcing their desire to keep buying assets until the outlook for jobs improves substantially.

“Fiscal policy is restraining economic growth,” the Fed said in its policy statement. “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation.”

Kansas City Fed President Esther George again dissented against the Fed’s support for growth, due to concerns about financial imbalances and long-term inflation expectations.

Until recently, analysts had expected the Fed to buy a total of $1 trillion in Treasury and mortgage-backed securities during its ongoing third round of quantitative easing, known as QE3, with the Fed starting to take its foot off the accelerator in the second half of the year.

Now, things are looking a bit more shaky.

“Expectations for tapering off of the Fed’s outcome-based purchases have been pushed back due to recent softening in the economic data,” according to a statement from the private sector Treasury Borrowing Advisory Committee released on Wednesday.

Economic growth rebounded in the first quarter after a dismal end to 2012, but the 2.5 percent annual rate of expansion fell short of economists’ estimates, and forecasters are already penciling in a weaker second quarter.

The housing market continues to show signs of strength, with home prices posting their biggest yearly gain since 2006, the year the market began a historic slide that snowballed into a global financial crisis.

However, the industrial sector is not quite as perky, with a report on Wednesday showing national factory activity barely grew in April.

And the job market, the focus of much of the Fed’s efforts, remains sickly. U.S. employers added only 88,000 workers to their payrolls in March and data on Wednesday suggested continued weakness in private-sector employment.

At the same time, inflation has steadily been coming down. The Fed’s preferred measure of core inflation, which excludes more volatile food and energy costs, rose just 1.1 percent in the year to March. Overall inflation was up just 1 percent, the smallest gain in 3-1/2 years.

The Fed targets inflation of 2 percent.

CHECKING THE TOOLKIT

In response to a deep financial crisis and recession, the Fed cut overnight interest rates to effectively zero in late 2008. It has also bought over $2.5 trillion in assets, more than tripling its balance sheet, to keep long-term rates low.

If the economy’s fortunes do not improve, the central bank may well look for fresh ways to boost its support to the economy, and increasing the amount of assets it is buying is just one option.

The Fed could announce an intent to hold the bonds it has bought until maturity instead of selling them when the time comes to tighten monetary policy. Fed Chairman Ben Bernanke has already raised this as a possibility.

Policymakers could also set a lower unemployment threshold to signal when the time might be ripe to finally raise rates. Currently, the threshold stands at 6.5 percent, provided inflation does not threaten to breach 2.5 percent.

Research suggests such “forward guidance” about the future path of interest rates can have a strong impact on current borrowing costs, and one Fed official – Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank – has already suggested lowering the threshold to give the economy a boost.

(Additional reporting by Alister Bull; Editing by Tim Ahmann and Andrea Ricci)

The U.S. central bank wants to drive down high unemployment
while keeping inflation near its 2 percent target. Data released
on Monday showed prices were heading in the wrong direction.

The Fed’s favored gauge of consumer prices – the personal
consumption expenditures price index – fell to 1.0 percent
year-on-year in March from 1.3 percent in February. It was the
smallest gain in 3-1/2 years.

“This is another force pushing toward the Fed continuing on,
with no tapering (of bond purchases) this year,” said Dean Maki,
chief U.S. economist at Barclays Capital in New York.

On the other hand, it will take evidence of weaker growth
and a softer labor market spilling into more widespread
expectations for lower prices to prompt the Fed to seriously
consider increasing the scale of bond purchases, he said.

The Fed is currently buying $85 billion of longer-dated U.S.
Treasuries and mortgage-backed bonds every month. It is expected
to vote to keep doing so at the conclusion of a two-day
policy-setting meeting on Wednesday. A statement announcing the
decision is scheduled for release at 2 p.m. (1800 GMT).

Commodity prices have slipped in recent weeks, with gold
falling sharply and Brent oil prices also down some 13 percent
from a February peak around $119 a barrel.

The Fed tries to look past short-term swings in energy and
food prices. Instead, it focuses on trends in so-called core
inflation, which excludes these often-volatile prices.

But the core PCE price index has also been dropping. In
March, it dipped to 1.1 percent – the lowest in 2 years – from
1.3 percent in February.

“Core PCE inflation briefly hit the Fed’s 2.0 percent target
in March 2012 for the first time since 2008, but it has fallen
by almost a point now in the past year after a substantial
slowing since mid-2012,” said Ted Wieseman at Morgan Stanley.

“Along with the sluggish outlook for second quarter growth,
the increasing miss on the inflation side of the Fed’s dual
mandate we believe has removed the risk of an early start to QE
tapering.”

INFLATION EXPECTATIONS STABLE

At the Fed’s last meeting in late March, some officials
voiced confidence that improving U.S. economic growth might
warrant a tapering in the pace of bond buying in coming months,
according to minutes of the meeting.

But a weak March employment report released earlier this
month, plus other softer signals from the economy, appeared to
make that less likely. The dip in prices cements that view.

“Both core and headline inflation are now about 100 basis
points (1 percentage point) below the Fed’s 2 percent long-term
goal,” Michael Darda, chief economist at MKM Partners LLC, wrote
in a note to clients.

“With unemployment still about 200 basis points above what
the Fed believes is its long-term sustainable level, previous
talk of Fed tapering should die down even if the macro data
strengthens.”

The unemployment rate was 7.6 percent in March and Fed
officials think they could get it down to the 5.2 percent to 6
percent range before wage pressures increase enough to threaten
a rise in inflation.

The Fed specifically targets 2 percent inflation as measured
by the PCE price index and not the more popular Consumer Price
Index. The CPI stood at 1.5 percent year-over-year in March,
while core CPI was up 1.9 percent from a year ago.

The difference might matter to policymakers because Treasury
Inflation Protected Securities, or TIPS, which the Fed uses to
weigh expectations for future inflation, are calculated using
the CPI.

The Fed will seek confirmation that lower inflation as
measured by the PCE price index is getting baked into
expectations for lower prices generally, before giving credence
to the risk of a damaging deflationary trend that would warrant
raising the pace of bond buying.

This is not yet happening. The break-even spread for the
10-year TIPS, which measures the difference in yield between the
TIPS and a normal Treasury note, was 2.35 percent in Monday
afternoon trading, little changed from late last week.

Esther George, president of the Kansas City Fed, is an exception. As she surveyed the cattle ranchers, energy bosses and other business leaders waiting to hear her speak at an event in El Reno, Oklahoma this month, she had a lot in common with her audience.

Like many of them, George has become troubled that the dramatic measures the Fed has taken to restore U.S. growth might fuel inflation and asset price bubbles.

Raised in a similar farm community in neighboring Missouri, George was picked for the job for her ability to speak for the heartland, and she proved with her first vote on monetary policy that she would have no hesitation in doing so.

At the Fed’s first meeting of the year on January 29-30, George dissented against a decision to buy $85 billion in bonds per month to push borrowing costs down. It was the first time in the Fed’s 100-year history that a policymaker used their debut vote to dissent.

“She’s got good Midwestern roots, a farm girl’s common sense,” said Dallas Fed chief Richard Fisher, who dissented against easy monetary policy twice in 2011. “Voices like Esther’s prevent (the Fed) becoming locked into group-think.”

The U.S. central bank has held benchmark interest rates near zero since December 2008 and has bought about $2.7 trillion in government and mortgage-related debt in a further effort to drive down borrowing costs and foster growth.

A dissent, even if it fails to halt the action supported by the majority of voting Fed policymakers, can exert a moderating influence as the central bank’s chairman seeks to preserve a degree of consensus. With her vote, George became the flag-bearer for officials opposed to the Fed’s easy money stance.

There are 12 regional Fed branches, each theoretically independent from the central bank’s board in Washington. The presidents of 11 of these regional Fed banks rotate in and out of voting seats on the central bank’s policy-setting panel, while the seven members of the Washington board and the head of the New York Fed enjoy permanent voting status. The system was designed so there would be some counter-balance to East Coast power centers to protect the interests of Middle America.

George has been president and CEO of the Kansas City Fed since October 2011, and in January she landed in a voting seat.

FROM FARM TO FED

Esther Lynn George was born on January 15, 1958, in the cattle town of St. Joseph, Missouri and grew up on her family’s farm in a small community called Faucett, a few miles to the south.

She earned a bachelor’s degree in business administration from Missouri Western State University in St. Joseph, and an MBA from the University of Missouri-Kansas City. She also graduated from non-degree programs at the American Bankers Association Stonier Graduate School of Banking and the Stanford University Executive Program.

She joined the Fed in 1982 after a couple of years in the private sector, and has never looked back, winning a series of promotions in the male-dominated institution and eventually rising to become the Kansas City Fed’s top bank regulator and then its first vice president, the bank’s No. 2 post. She took over the presidency on October 1, 2011.

“She is a great listener,” said Julie Stackhouse, head of banking supervision at the St. Louis Fed, who worked with George for 15 years in Kansas City and is still close. “She is able to bring together individuals who sometimes have differences of views simply by being in the mix of the discussion.”

Described as warm, likeable and down to earth in numerous interviews with current and former Fed officials and others who know her, George, who declined to be interviewed for this article, has also shown a tough side in delivering plenty of bad news to banks over the years.

Hundreds of banks were closed or needed help in the Kansas City Fed’s district during the savings and loans crisis of the 1980s and 90s. George carried a briefcase filled with padlocks and chains to some banks so she could lock up filing cabinets to secure loan documents pledged as collateral to the Fed.

Bob Regnier, president of the Bank of Blue Valley in Kansas City, who has known her for more than 25 years, said her fair, straightforward manner had won her respect.

“She will bring additional viewpoints and additional ideas to the table. She’s a very strong leader,” he said.

PRACTICAL SPOKESWOMAN

Thomas Hoenig, George’s predecessor at the Kansas City Fed and now a top bank regulator in Washington, said George brings “intellectual integrity” and balance to the job.

“People are concerned that the Federal Reserve isn’t broadly enough represented in terms of the country, and in terms of input from across the country,” said Hoenig, who dissented at every FOMC meeting in 2010 out of concern Fed policy was too easy.

People involved in the selection process for the Fed regional presidency say George’s local roots and Midwestern values of common sense and hands-on experience are what got her the job in the first place.

Terry Moore, president of the Omaha, Nebraska branch of the AFL-CIO labor organization, chaired the committee the board of the Kansas City Fed established to find a successor to Hoenig. Moore said there was clear pressure from the Fed in Washington to install a PhD-trained economist in the position, but George “smoked” those other candidates in the interviews.

“Esther is a practical, articulate spokeswoman for what goes on back here,” said Mark Gordon, Wyoming state treasurer and another search committee member.

Gordon rejected the suggestion they had simply sought another anti-inflation hawk in Hoenig’s mold. “I think it was more sense vs theory,” he said, adding: “I just wish we had a bit more of (that) in Washington.”

Although the Fed has tried to explain that its policies aim to help Main Street, not Wall Street, it has become a persistent target for Tea Party fiscal conservatives incensed at its involvement in Wall Street bailouts. That is certainly true in George’s Fed district, which comprises Wyoming, Nebraska, Colorado, Kansas, Oklahoma and parts of New Mexico and Missouri.

ON THE ROAD

George renewed her opposition to the Fed’s quantitive easing policy in March and can be expected to dissent again when the Fed’s next meeting wraps up on Wednesday.

George has also taken her message on the road to reassure critics in her Midwestern district that she understands their alarm and is speaking up for them in Washington.

While America is still recovering from a deep recession, with the unemployment rate at a lofty 7.6 percent, this part of the country is doing relatively well.

Oklahoma’s jobless rate stands at 5.0 percent, the eighth lowest in the United States, and land prices are soaring thanks to strong demand for the oil and agricultural commodities the state produces, not to mention the low interest rates that the Fed has engineered.

On the day before the April 4 Oklahoma speech, George bumped along muddy dirt tracks to visit a gas processing plant, and sampled El Reno’s local delicacy – onion burgers – at Sid’s, a popular diner. Along the way, she heard plenty from a community wary of decisions taken back East, and she made plain in her speech where she stood.

“I view the current policies as overly accommodative, causing distortions and posing risks to financial stability and long-term inflation expectations with the potential to compromise future growth,” she told the 100-odd guests over a hearty beef-and-potatoes lunch.

(Reporting by Alister Bull; Editing by Tim Ahmann and Claudia Parsons)

Several Fed policymakers last week cited a readiness to
increase the pace of bond buying to defend their goal for 2
percent inflation, including arch-hawk Jeffrey Lacker, president
of the Richmond Fed. They just don’t expect inflation to
continue to fall happen.

U.S. consumer prices, as measured by the Fed’s preferred
gauge, were up only 1.3 percent over the 12 months through
February, well below the central bank’s 2 percent target.

“If I thought it were going to persist this low or even fall
further, I, of course, would be giving serious thought to
providing monetary stimulus to get the inflation rate back to 2
(percent),” Lacker said on Thursday.

“I don’t see a material risk now of the rate of inflation
falling substantially further.”

However, Fed officials are clearly signaling the decline in
inflation has gotten their attention, even if it is not yet
flagging a re-run of the much clearer deflation scare that
pushed the Fed to deliver a second round of so-called
quantitative easing, or QE2, back in 2010.

Policy centrist James Bullard, head of the St. Louis Fed and
a voter this year, said on Wednesday he would be willing to
increase the pace of purchases if inflation continued to fall.
Minneapolis Fed chief Narayana Kocherlakota also made a similar
point last week.

Inflation has been helped lower by sliding commodity
markets, led by gold, which has nosedived in recent weeks. Oil
prices are off 16 percent from the year’s high for Brent crude
, while broader commodity price indexes have also slipped
over 7 percent this month, according to the Standard and Poor’s
Goldman Sachs Commodity Index.

GOLD GLOOM

The decline, particularly of gold, has spurred market
speculation of a looming deflationary threat amid scepticism
that major central banks will be able to revive global growth.

Fed officials are not terribly worried by the swing in the
gold price, and point out it responds to many different themes
in financial markets, including price pressures.

But they readily agree that inflation is also not heading
higher, a point Fed Chairman Ben Bernanke repeated to colleagues
at the G20 meeting in Washington late last week

That view will aid doves at the Fed’s upcoming meeting on
April 30-May 1 in their argument that it needs to keep buying
bonds at an $85 billion monthly pace until well into the fall.

Minutes of the meeting last month revealed many policymakers
thought stronger growth might warrant buying being reduced over
coming months. But a weak March jobs report and other signs of a
so-called ‘spring swoon’ in U.S. growth have pushed back
expectations of imminent tapering.

However, Fed officials say lower commodity prices should be
treated in the same way by policymakers as rising prices in the
past, when the Fed showed patience in the face of spikes in
energy and food costs that temporarily buoyed inflation, at
least until they translate much clearer warnings of deflation.

“I don’t think anyone is forecasting this thing going down
much further,” said Chris Waller, head of research at the St.
Louis Fed. “But our target is 2.0 percent, not 1.3 percent …
and in that sense we’d like to get inflation up to target.”

Yet, with expectations for future inflation still hovering
comfortably above 2 percent, the Fed would need to see clear
downward pressure from the real economy pushing in the other
direction to grow seriously alarmed.

“If we kept seeing payroll numbers of 88,000 for the next 4
or 5 months, then I think we would have concerns about both
inflation and the economy heading on the downside,” said Waller.

March payrolls showed a disappointing 88,000 jobs added in
the month, breaking a run of stronger-than-expected jobs numbers
and putting markets on edge the recovery may stumble again, as
it has in each of the last 3 years.

TIPS SPREAD NARROWS

One way the Fed keeps tabs on inflation expectations is via
the break-even spread between yields on Treasury Inflation
Protected Securities, or TIPS, and normal treasury bonds.

TIPS prices fell sharply on Thursday after a disappointing
auction that reflected diminished concerns over inflation, with
the 10-year TIPS break-even rate suffering its sharpest one-day
decline in seven months.

But even after ending 12 basis points narrower on the week,
the 10-year TIPS break-even spread still closed at 2.32 percent.

Back in 2010, when the Fed’s preferred inflation gauge
averaged 1.0 percent in the third quarter and 0.8 percent in the
fourth quarter, the break-even spread on the 10-year TIPS
touched a low of 1.56 percent on the eve of the annual central
banking symposium at Jackson Hole, Wyoming, in late August.

Bernanke hinted at QE2 during the conference, and within a
few weeks the break-even spread was back above 2 percent.

The Federal Reserve Bank of Atlanta runs a deflation
probability calculator on its website. This currently shows the
probability of a lasting deflation is zero, based on readings
from the TIPS market.

True, TIPS are not a foolproof way to measure future
inflation expectations. But alternative sources of evidence
give similar indications.

“We have a lot of reason to believe, from a variety of other
indicators, that the probability of a deflation is very low,”
aid Mike Bryan, a senior economist at the Atlanta Fed. “When we
talk to businesses, the outlook, positive or negative for
inflation, seems pretty sanguine.”

The conference, held in late August in the splendor of the Grand Teton National Park in Wyoming, draws top central bankers from around the world. Bernanke’s absence would mark the first time in 25 years that a Fed chairman has not attended.

A Fed spokeswoman, responding to a Reuters enquiry, said the chairman was currently not planning to attend because of a personal scheduling conflict.

Bernanke, and former Fed chair Alan Greenspan, whom he succeeded in 2006, have periodically used the setting to preview important U.S. central bank actions. For instance, Bernanke hinted at the impending launch of a third round of massive bond purchases by the Fed – dubbed QE3 – at the conference last August.

In 2008, the conference effectively became the site of an economic war room as top policymakers huddled to figure out how to tamp down a virulent financial crisis as investment bank Lehman Brothers hurtled toward collapse.

This year’s meeting would have been viewed as an excellent opportunity for Bernanke to signal that the central bank might be leaning toward tapering bond purchases, if the economy continues to recover as officials hope.

The Fed is currently buying $85 billion worth of U.S. Treasury and mortgage-backed bonds every month, and is expected to vote to maintain that pace at its upcoming meeting on April 30-May 1.

The Jackson Hole event is the foremost monetary policy conference in the annual global central banking calendar and gathers a who’s who of policy thinkers and practitioners.

Started by the Kansas City Federal Reserve Bank in 1978, the symposium is held in the park’s Jackson Lake lodge, overlooking the majestic Teton mountain range.

(Reporting by Alister Bull; Editing by Tim Ahmann)