By Jonathan Spicer and Ann Saphir
ST LOUIS/ BOISE, Idaho (Reuters) - While officials of the Federal Reserve have sparred over whether the U.S. central bank should continue full-bore with its massive bond-buying stimulus, two Fed officials with differing policy views agreed on Thursday that a national debt default could have devastating effects.
Budget gridlock at the U.S. Congress led to an October 1 partial government shutdown that threatens to hurt economic growth and has already delayed the release of key economic data such as the September jobs report. Lawmakers are now locked in debate over how to raise the government's borrowing limit and avoid a U.S. debt default on October 17.
John Williams, the president of the San Francisco Fed and a policy centrist, on Thursday said politicians in Washington are playing a "very, very dangerous game" with their brinkmanship, and said the failure of the government to pay its bills could undermine world confidence in the U.S. dollar, and in the extreme could cause a global financial panic.
St. Louis Fed President James Bullard also had strong words for Congress.
"It's just imperative that we do not go in this direction and get into a situation where we're not paying some of our bills," Bullard said, noting the U.S. dollar is the world's reserve currency and the United States is seen as a safe-haven investment.
"There's no reason to let a self-inflicted wound put that at risk," he said. "We want to protect our international reputation ... and get this thing done."
On policy, though, the two officials staked out differing views that mirrored the split at the Fed's policy-setting panel as a whole.
Bullard, who is a voting member of the policy-setting panel this year and who supported last month's shock decision to keep the bond-buying program at its current level, said fiscal problems in Washington have "changed the odds" on whether the central bank will reduce the bond-buying program at its upcoming meeting on October 29-30.
Last month "we cited that fiscal uncertainty was a risk and that risk has materialized, so I think that's making it less likely than would otherwise be that we make a decision to taper in October," Bullard told reporters on the sidelines of a conference hosted by the St. Louis Fed, adding that the debt-ceiling debate also plays a big role.
He said he has not made up his mind and didn't want to pre-judge the October meeting, though he added that the Fed can be patient with its quantitative easing program until inflation rises closer to the Fed's 2 percent target.
The San Francisco Fed's Williams, who is viewed as a policy centrist and who does not have a vote on policy this year, said he would have been open to reducing the Fed's $85 billion-a-month in bond purchases at last month's meeting.
"I personally wasn't as far away from being willing to initiate a small taper" compared with some other top Fed officials, Williams told reporters.
Fed Chairman Ben Bernanke said in June the Fed would probably reduce its bond purchases later this year and end the purchases by mid-2014.
A decision on when to taper and end the program will hinge on the momentum in the economy, Williams said. When the time comes, he said, investors should expect the Fed to scale back bond-buying slowly.
"This won't be a slamming on the brakes, it will be an easing off the gas," he told a group of business leaders and politicians at Boise State University.
Williams, however, did not suggest that the budget debates would necessarily mean the Fed should hold off on tapering. If they do result in a new round of fiscal austerity next year, he said, the Fed may have to keep policy super-easy for longer than currently anticipated.
"We'll have to watch. I don't want to speculate on what Congress and the president are going to decide. What they decide obviously does frame the economic outlook and obviously that frames the policy outlook too," he said.
"I would hope that Congress and the politicians would come to agreements that would last longer than six weeks, to add a little bit more certainty to the environment."
(Reporting by Ann Saphir in Boise, Idaho, and Jonathan Spicer in St. Louis; Editing by Leslie Adler)