UPDATE 1-Strong case for Fed to stay course on bond buys -Rosengren

Mon Dec 3, 2012 2:59pm EST

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By Jonathan Spicer

NEW YORK Dec 3 (Reuters) - There is a "strong case" for the U.S. Federal Reserve to stay the course on accommodative policies in the new year and continue buying a total of $85 billion in bonds each month, a top central bank official said on Monday.

A week before Fed officials hold a high-stakes meeting to decide on their policy plan for early 2013, Boston Fed President Eric Rosengren said the current level of long-term asset purchases is appropriate.

To boost the slow U.S. economic recovery and lower unemployment, the central bank now buys Treasury securities and mortgage-backed securities (MBS).

Part of that is a program called Operation Twist in which the Fed buys $45 billion in longer-term Treasuries and offsets that with the same amount in sales of shorter-term Treasuries. But Twist expires at year end, leaving only $40 billion in MBS purchases - unless policymakers fill in the gap.

"A strong case can be made for the Federal Reserve continuing to purchase the current $85 billion in longer-term securities a month - even after our so-called 'Operation Twist' maturity-extension program" ends, Rosengren said in prepared remarks to a mortgage conference at the New York Fed.

Rosengren, who regains a vote next year on the Fed's policy-setting committee, did not specify which assets should be targeted. But he said buying MBS may be preferable to Treasuries in order to improve market functioning and to stimulate demand in interest rate-sensitive sectors, arguing the policy likely has an impact beyond mortgage markets.

Rosengren is a dovish policymaker who has repeatedly warned about the perils of allowing the jobless rate - now at 7.9 percent - to remain high.

"Given the tepid economic recovery, high unemployment, and subdued inflation - and the uncertainty around fiscal policy - I believe an accommodative monetary policy is quite appropriate," he said.

"We want to see continued improvement in labor markets in the near term, and monetary policy should encourage faster economic growth to achieve that objective."

The central bank has bought some $2.5 trillion in bonds and has kept interest rates at almost zero since late 2008. Economists generally expect the Fed to replace most if not all of the $45-billion shortfall in longer-term asset buys, at the Dec. 11-12 meeting.

Policymakers will also discuss the possibility of adopting so-called policy thresholds that would clarify what economic conditions that would warrant a change in monetary policy.

Rosengren redoubled his support for such a move on Monday, arguing thresholds would have real benefits to communicating the Fed's policy intentions. But policymakers are not in agreement over whether to adopt them, or on what markers to use to signal when interest rates might have to rise, he added.

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