By Ann Saphir and Kim Palmer
CHICAGO/CLEVELAND (Reuters) - Three Federal Reserve doves on Wednesday stoutly defended the central bank's bond buying to spur U.S. growth, but one official normally viewed as a centrist suggested it would not take much more improvement in job creation to warrant scaling it back.
Cleveland Federal Reserve Bank President Sandra Pianalto, among four Fed policy makers speaking in public on Wednesday, sounded a cautious note on the need to maintain the current pace of purchases that might hint at a shift in the consensus.
"I would regard a slowing in the pace of asset purchases to be a welcome direction for monetary policy if it resulted from a significant improvement in the outlook for labor market conditions," Pianalto told a lunch in Cleveland. "That outcome could emerge before long, but it still remains to be seen."
Her comments went slightly further than Fed Chairman Ben Bernanke did during a news conference last week, when he emphasized that the pace of bond buying could be increased or lowered, without intimating any changes were imminent.
Bernanke speaks for the committee and is the key person to watch for a looming shift in policy. With the Fed expected to hold interest rates near zero until 2015 or longer, changes in the Fed's bond buying may be the only shifts in U.S. monetary policy in the next few years.
Policymakers voted last week to keep buying bonds at a monthly pace of $85 billion until the labor market outlook improved substantially. The Fed also repeated its promise to hold interest rates near zero until unemployment hit 6.5 percent, provided inflation does not threaten to break above 2.5 percent.
The unemployment rate in February was 7.7 percent, which is high by U.S. standards. Still Pianalto, who is not a voting member of the Fed policy-setting committee this year, noted that new monthly job creation had averaged around 200,000 for the last five months.
"I would judge the outlook for labor market conditions to have improved substantially when — among other factors — I've seen a few more months of job gains at that 200,000 rate ... I could then see a basis for slowing the pace of asset purchases."
In contrast, the Fed doves -- worried the economy is still in a perilous state -- argued the scale of so-called quantitative easing was appropriate and played down concerns that it was potentially risking asset bubbles and future inflation.
"Put simply, the benefits of our asset purchases have exceeded any reasonable estimate of the costs," Boston Fed chief Eric Rosengren said in Manchester, New Hampshire. "I see little evidence that our monetary policies are generating significant financial stability problems at this time."
Chicago Fed boss Charles Evans, another leading Fed dove, made a similar argument to reporters when he warned about the risks of prematurely tapering bond purchases back.
"I want to be really careful in thinking about what the implications of reducing the flow will be," said Evans, a voting member of the Fed's policy-setting panel this year. "I want to make sure that it wouldn't be inferred as premature, or a little weak in the knees."
Minneapolis Fed President Narayana Kocherlakota, who favors lowering the stated jobless rate at which the Fed would begin to consider raising rates to 5.5 percent, went even further: "Monetary policy is currently not accommodative enough," he told local business groups in Edina, Minnesota. Kocherlakota is not a Fed voter this year.
U.S. inflation remains well beneath the Fed's goal of 2 percent and unemployment lofty by historic standards, he argued, so the Fed should do even more to spur hiring.
The Fed cut rates to almost zero in late 2008 and has since tripled the size of its balance sheet to around $3 trillion via bond purchases aimed at lowering longer-term borrowing costs.
A Reuters poll published two weeks ago found that economists expect the Fed to keep buying bonds until at least the first quarter of 2014.
The central bank's super easy policy has fanned criticism that officials are unwittingly creating conditions for another asset bubble, and Bernanke has gone out of his way to make clear he takes this risk seriously, even as he continues to champion the bond buying program.
Rosengren, who is a voter on the Fed's policy-setting committee this year, played down the dangers of asset purchases leading to instability and even spelled out why valuations in stocks, housing and high yield bonds might be justified.
"Interest rates in most markets have fallen, and asset prices are rising. This is the expected and intentional result of the Fed's efforts to promote a more rapid return to more normalized conditions," he said.
(Reporting by Pedro Nicolaci da Costa and Alister Bull in Washington, Scott Malone in Manchester, N.N., and David Bailey in Edina, Minn.; Writing by Alister Bull; Editing by Tim Ahmann and Chizu Nomiyama)