WASHINGTON - President Barack Obama's nominees to the Federal Reserve Board told a Senate panel Tuesday their decisions on the right time for the Fed to begin withdrawing its monetary stimulus would be dictated by conditions in the economy, and not a fixed date.

"At the broadest level I would want to be guided by the Fed's dual mandate," Harvard professor Jeremy Stein during a nomination hearing by the Senate Banking Committee, adding the key is to monitor both economic and inflation data.

Jerome Powell, the other nominee and a former Treasury undersecretary under President George H.W. Bush, said the timing of the Fed's switch to policy tightening "is a critical, critical question."

"It has to be weighed under the dual mandate, of which both aspects are equal," Powell added.

The Fed's policymaking Federal Open Market Committee has said it expects economic conditions will likely warrant short-term interest rates remaining at historic lows through to late-2014.

"My understanding and my interpretation of that, is that's not a commitment on the part of the Federal Reserve," Stein said. So if the economic situation were to change, for example strengthening faster than expected, he said it would be warranted to revisit the path of the easing -- "guided by the dual mandate."

Powell pointed to the "reaction function" released by the FOMC following its January meeting -- "which is to react in a balanced and symmetrical way" -- and said he would certainly be bound by that.

He added that it is not possible to set a date now for when tightening will begin, rather "it's going to depend on the future path of the economy."

Stein said he believes both pillars of the Fed's mandate -- maximum employment and price stability -- are on an equal footing and argued that on this occasion, both goals are likely to be complementary.

"As the economy strengthens it will both tend to push inflation up and to push employment up as well, so you'll be moving in the same direction of converging on both the two goals," he said.

Right now, however, Stein said the Fed is maintaining its highly accommodative policy because they are pushing against "a relatively strong headwind" from the housing market.

Powell agreed the Fed's stimulus is not having the desired effect because of the housing market's struggles.

"You can see them wracking their brains about ways to help the housing market, if there were a silver bullet I think we would have used it by now," he said.

The timing of the Fed's exit from its balance sheet, and its highly accommodative policy, is "one of the most critical questions that we would face if confirmed at the Fed," Powell said.

Powell disagreed with the assertion of the committee's ranking member, Sen. Richard Shelby, that the Fed has yet to lay out its plans to withdraw the massive amounts of monetary stimulus it has injected.

"In the June 2011 (FOMC) minutes they announced a plan and they sort of announced a series of steps that they would take ... ending with asset sales," he said.

Powell went on to describe the scale of the Fed's eventual exit as "unprecedented and terribly important," while also warning of the "tremendous risk" involved.

"You run the risk of inflation -- disturbing inflation expectations, asset bubbles and all of that," he said.

The timing of the exit will also be key, Powell said, cautioning that beginning too early risks snuffing out a recovery that remains weak, while withdrawing the stimulus too late could unleash inflation.

Stein agreed with his fellow nominee, calling the Fed's wind down of its balance sheet "one of the most important tasks for the Fed over the next several years for sure."

He noted that the Fed on a number of occasions has been very good about increasing its transparency.

"My guess is that as the moment gets closer, it will be important to start letting markets know the tactics -- the tactical level of decisions and how things will evolve," Stein said.

Stein stressed his committed to being transparent, and the importance of not disrupting financial markets by unwinding the Fed's balance sheet "in an unexpected way."

The Fed's seven-member Board of Governors has two vacancies. While the term of Elizabeth Duke, an appointee of President George W. Bush, expires Jan. 31, she can continue to serve until a successor is appointed.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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