Mexico's Carstens urges careful unwinding of Fed's QE

By Ann Saphir

PALO ALTO, California (Reuters) - Mexican central bank governor Agustin Carstens on Thursday called on the Federal Reserve to execute a "careful unwinding" of its massive bond-buying program, and said Mexico was prepared in the event of massive capital outflows that could result.

"You have to be prepared for the times where you are seeing capital inflows ... you have to be prepared for when the capital comes out," Carstens told the Stanford Institute for Economic Policy Research.

The Fed's bond-buying program has prompted investors to pour capital into emerging markets. When the Fed reduces that program, currently $85 billion a month of Treasury and mortgage-backed debt buying, some expect that process to reverse.

If capital outflows are severe, Mexico might need to use its reserves as a cushion, Carstens said.

Carstens spoke just a few hours after U.S. senators grilled Fed Vice Chair Janet Yellen about her plans for policy if they confirm her nomination to be the next Fed chair. Yellen did not offer any timeline on winding down the Fed's bond-buying, but said that, as the program gets bigger, the more it will need to worry about its potential costs.

To Carstens, there was no question that the Fed had no choice but to push policy into uncharted territory to deal with the depth of the financial crisis and the risks of financial instability.

Without the Fed's asset purchases, he said, "we would have had a far more difficult time."

At the same time, though, unwinding the current program poses risks, including heightened volatility in financial markets.

Carstens said that flexible exchange rates have served the North American region "extremely well," and allowed Mexico to weather the financial crisis in the United States better than it otherwise could have done.

A single currency, like Europe's euro, "is not a good idea," he said.

Each country in the region should undertake key policy actions, he said. The United States, for instance, should put in place a credible plan for fiscal consolidation over the medium term. That would help boost confidence and growth throughout the region, including Mexico, Canada and the United States itself.

(Reporting by Ann Saphir; Editing by James Dalgleish and Andre Grenon)