By Jonathan Spicer
NEW YORK (Reuters) - A hawkish Federal Reserve policymaker on Friday sharply criticized her colleagues' decision this week not to reduce the Fed's bond-buying program, warning it sowed confusion and risked the U.S. central bank's credibility given how convinced financial markets were that policy would be adjusted.
Kansas City Fed President Esther George, the lone dissenter on Wednesday's policy decision, said she was "disappointed." She noted the "costly steps taken to prepare markets" in recent months for a policy change, and warned that the Fed's message has been muddled.
"The actions at this meeting, and the expectations that have been set relative to how markets were thinking about this, created confusion, created a disconnect," George told a meeting of the Shadow Open Market Committee, a group critical of the Fed's easy-money stance.
The Fed "will also have to think about the challenges that come with issues of credibility and the predictability of policy actions," George said. The central bank now "faces ahead of it some difficult moves," she added.
The central bank surprised financial markets globally this week when it decided to keep buying $85-billion worth of bonds per month. It cited fiscal headwinds and tighter overall financial conditions as reasons to continue its aggressive support for the U.S. economy.
Back in June, Chairman Ben Bernanke said the Fed expected to trim its bond-buying later this year and to end it around mid-2014. He seemed to step back from that timeline in a Wednesday press conference, giving investors more reason to drive up risky assets around the world, including U.S. stocks.
George, an isolated voice on the policy-setting Federal Open Market Committee, has dissented at every meeting this year and did so again this week on views the low-rate policy could lead to asset-price bubbles.
"We will continue to add to that balance sheet ... and the conditions will remain for some time that allow risk and imbalances to grow," she said.
"Waiting for more evidence at this point in the face of continued economic growth unnecessarily discounts the very real progress that we see, and it also discounts the potential costs of the policy tool with which we have limited experience."
George urged fellow policymakers to rely less on the bond-buying program and more on telegraphing when the Fed will finally raise interest rates. But now, asking markets to trust such so-called forward guidance "is going to require a great deal of credibility and communication," she said.
Earlier this month, George publicly urged the Fed to reduce the asset purchases to $70 billion per month at the September meeting.
"It was my sense at this meeting that moving now and moving slowly would not eliminate volatility in the market but it could give the market space to begin to adjust gradually," she said Friday.
(Reporting by Jonathan Spicer; Editing by Leslie Adler and Andrea Ricci)