By Ann Saphir and Jonathan Spicer
CHICAGO/NEW YORK (Reuters) - A handful of Federal Reserve policy doves on Tuesday showed no sign they were prepared to dial down the central bank's extraordinary accommodation any time soon, even though one gave a highly optimistic outlook that the economy will turn the corner next year.
Charles Evans, president of the Chicago Fed, forecast moderate growth this year of 2.5 percent, but gave a hearty endorsement of the economy's trajectory, saying he expects 2014 to be "terrific."
"I am optimistic that this is going to be the year that really makes a difference and we start to take off towards the end of this year," Evans said.
Even so, Evans said he sees a "high probability" the Fed will need to keep buying bonds through at least the fall of this year to keep bringing down unemployment, now at 7.6 percent, though after that the Fed may be in a position to trim purchases.
"I think it's entirely possible that by the end of 2013 we are beginning to exit the asset programs, winding them down, that's possible," he said, speaking at the Union League Club in the heart of Chicago's financial district. "I kind of think it might be into the first part of 2014, actually."
The influential chief of the New York Fed, William Dudley, offered a more muted view on the economy, saying that the weak March employment report -- which showed that job gains were a paltry 88,000 and that droves of Americans gave up the search for work -- made him more cautious on how far the economy has come.
Dudley, who addressed a business audience in the New York borough of Staten Island, forecast "sluggish" growth this year of 2 percent to 2.5 percent and only a modest decline in unemployment.
He said he expects "at some point" to see sufficient evidence of improved economic momentum to favor gradually dialing back the central bank's stimulative asset purchases.
"Of course," he added, "any subsequent bad news could lead me to favor dialing them back up again." <ID: L2N0D30KT>
Frustrated with the slow and erratic economic recovery from the 2007-2009 recession, the Fed has kept interest rates at rock bottom since December 2008 and is buying $85 billion in Treasury and mortgage bonds each month to spur investment, hiring and overall growth.
The Fed has said it will keep buying bonds until the labor market outlook improves substantially, prompting investors to anxiously predict when the first policy tightening will come.
Speaking at an International Monetary Fund forum in Washington, Fed Vice Chair Janet Yellen, a strong backer of the quantitative easing, stressed that unemployment was the key challenge and argued that monetary stimulus should be conducted within the context of a flexible inflation target.
Elsewhere in the capital city, Fed Governor Elizabeth Duke said interest rates should stay low until the economy improves, despite the difficulties that may cause for banks.
"To raise rates or to let rates rise in a very weak economy would ... make the environment that much more difficult," she told the American Bankers Association.
EYES ON ECONOMY, WASHINGTON
Economic data released Tuesday underscored the need for the U.S. central bank to keep buying bonds apace.
U.S. consumer prices fell in March for the first time in four months while factory output slipped. Other data on Tuesday suggested the housing market recovery was losing momentum, even though housing starts jumped in March to their highest level since 2008.
The four policymakers each have a vote on the Fed's 12-member policy-setting panel, and their views on the need for continued bond purchases appear to be in sync with the majority of the committee, including Fed Chairman Ben Bernanke.
Minutes from the Fed's most recent meeting, in March, showed that most policymakers favored continued purchases through at least the summer, if not longer.
In what could indicate growing confidence in the U.S. recovery, however, the Boston Fed dropped a long-standing call to lower the discount rate in the run-up to the central bank's March meeting, instead joining 10 other regional Fed banks in seeking no change.
Still, Dudley and others at the Fed have repeatedly complained that the U.S. government is not helping to nurture the economy, which grew at a tepid 1.7 percent last year in part due to a lackluster fourth quarter, when Superstorm Sandy took a heavy toll on parts of New York City, including Staten Island, and the New Jersey shore.
Growth is expected to have picked up in the first quarter of this year, but a large package of government spending cuts as well as higher taxes could yet dampen activity.
Dudley said he expects clarity on the effects of the fiscal tightening, "for better or worse," in coming months.
Evans repeated he wants to see job gains of at least 200,000 a month for several months and above-trend growth. If all goes well, he said, "2014 is really the year that we get out of this" and the year should bring "tremendous improvement" in the labor market outlook, adding that GDP is likely to grow at a 3.5 percent pace next year.
Evans said the Fed need not take a long time to wind down the asset buying if the labor market improves substantially, but it could end purchases "in a couple of weeks" if needed.
Once the Fed stops buying assets and finally starts to raise rates in the years ahead, the central bank will have to figure out how to reduce its balance sheet -- now worth some $3.2 trillion -- to a more familiar size closer to $1 trillion.
The debate over what the strategy should be is heating up.
Evans said that once the Fed is in a position to start raising rates -- only after unemployment has fallen to at least 6.5 percent -- he would be "extremely open-minded" to crafting an exit strategy that would continue to give appropriate support to the economy.
He did not elaborate, but he appeared to be suggesting support for the Fed to hold on to its mortgage-backed securities until they mature, rather than selling them gradually as the Fed has planned. That would align him with fellow dove Eric Rosengren, president of the Boston Fed.
Speaking in Beijing earlier Tuesday, the hawkish head of the Philadelphia Federal Reserve, Charles Plosser, argued against that view, saying that at this point he would not want the U.S. central bank to pledge not to sell assets in the years ahead.
Instead, Plosser said, the Fed may have to sell assets faster than currently expected in order to shrink the balance sheet down to size.
(Additional reporting by Emily Stephenson, Pedro da Costa and Alister Bull in Washington; Editing by Leslie Adler)