By Alister Bull, Reuters

New York

The key challenge for the next chair of the Federal Reserve will be resisting pressure for a premature tightening in monetary policy, a senior US central banker has said.

Narayana Kocherlakota, president of the Minneapolis Federal Reserve and one of several policy doves arguing the case for more action to spur US hiring, said most observers think the main problem for the Fed will be ending ultra-easy money. He said it is not.

“The real test for us ... (is) going to be about being able to keep a high level of accommodation in place, even as there (are) a lot of onlookers and observers calling on us to back off,” he said. “The leadership being provided by the chairperson in that regard will be critical.”

President Barack Obama is expected to nominate his choice to succeed Fed chief Ben Bernanke, whose term ends in January, in the next few weeks. A White House source has said that Fed vice chair Janet Yellen is the top candidate.

Some observers argue that whoever succeeds Bernanke will be judged on how smoothly an exit from five years of unprecedented monetary easing is executed.

The Fed cut interest rates almost to zero in late 2008 and more than tripled the size of its balance sheet, to $3.7tn, via three rounds of massive bond purchases aimed at holding down long-term borrowing costs.

Kocherlakota dismissed worries about the eventual exit from the Fed’s ultra-easy measures, saying that the question of how to normalise monetary policy has been “studied to death” within the Fed.

“We know about it. We have a great deal of confidence, based on our staff work, about how that is going to work,” he told an audience in Bloomington, Minnesota.

The Fed surprised financial markets last month when it voted to maintain its $85bn monthly pace of bond purchases, saying it wanted to see more evidence of solid economic growth.

The outlook for a scaling back bond purchases has grown cloudier since the budget battle in Washington hit a stalemate and forced a partial government shutdown.

The shutdown is courting a damaging debt default if lawmakers fail to raise the US debt ceiling by October 17.

Officials, including at the Fed, warn that a debt default could potentially tip the US into a severe recession if it shakes confidence in the ability of US lawmakers to lead the country.

But while the uncertainty created by the political gridlock in Washington has helped vindicate the Fed’s unexpected caution, some US policymakers remain unswayed about the need to scale back the bond buying.

Jeffrey Lacker, president of the Richmond Federal Reserve and a hawk on inflation, said he would have tapered in September, regardless of the looming shutdown.

“If you had told me a two-week shutdown was coming I would have favoured tapering in September anyway,” he told reporters after a speech in Baltimore.

“Federal Reserve policies cannot necessarily counteract the effects of fiscal policy uncertainty, declining productivity growth or structural changes in the labor market - all of which appear to be playing a role to some degree,” said Lacker, who does not have a vote on Fed policy this year.