FED FOCUS-When time's ripe, Fed officials see tapering bond buying

SAN FRANCISCO Thu Feb 7, 2013 7:07pm EST

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SAN FRANCISCO Feb 7 (Reuters) - The U.S. Federal Reserve should scale back rather than abruptly end its massive bond-buying stimulus once the labor market gets its legs, a growing number of Fed policymakers say.

Chicago Federal Reserve Bank President Charles Evans, one of the central bank's most aggressive doves, became the latest top Fed official to publicly embrace such a strategy.

"I believe we have tapered every asset purchase program that we have done to date so it would seem a bit surprising if we didn't do what we have done before," Evans told CNBC on Thursday in a taped interview posted to its website.

In September of last year, the central bank launched an open-ended bond-buying program, which it expanded in December after a separate stimulus effort ran its course.

It is currently buying $85 billion a month in government and mortgage-linked debt, and has said it plans to keep up the purchases until it sees a substantial improvement in the outlook for the U.S. labor market.

Evans said he believes the program will be needed for six months to a year, but "if the economy picks up more quickly than we're looking at, then we'll be very happy, and then we could wind it down, we might taper it, we could stop sooner."

Many bond traders and economists believe a sudden halt in the program could trigger a sharp rise in yields that would work against the Fed's goals.

"The market has become so accustomed to the Fed being there that their withdrawal on the purchasing side is going to be a significant event," said Thomas Simons, an economist at Jefferies & Co.

Tapering the purchases could also make it "easier to adjust if the economy hits a few bumps in the road," said Mark Vitner, a Wells Fargo economist.

Evans has said he would need to see the economy adding more than 200,000 jobs a month for about six months to be sure the labor market is on sound footing; other officials have identified an unemployment rate of 7.25 percent or 7 percent as thresholds that would indicate enough labor market improvement.

The U.S. economy has created an average of 177,000 jobs a month over the last six months, while the unemployment rate has only edged down to 7.9 percent from 8.1 percent.

Despite the broad range of views on when a policy change might be needed, the idea of tapering the purchases appears to have the support of Fed officials at both ends of the policy spectrum, as well as its middle.

Last week, St. Louis Fed chief James Bullard, viewed as a policy centrist, said the central bank should slow rather than suddenly halt its purchases once there is enough improvement in the employment picture to justify a change in policy.

Atlanta Fed President Dennis Lockhart, who supports the third round of quantitative easing called QE3, has also said the Fed could taper its purchases when the time is right.

Even Dallas Fed President Richard Fisher, an avid opponent of the bond-buying program, is on board.

"I don't want to go from wild turkey to cold turkey," he said on Monday.

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