Fed's Plosser says jobs report another reason to trim QE3

Philadelphia Federal Reserve President Charles Plosser speaks at an Economics21 event in New York, March 25, 2011.

PHILADELPHIA (Reuters) - The latest jobs report on Friday showed that government spending cuts have so far not been as damaging as some feared, Philadelphia Fed President Charles Plosser said, adding it only entrenched his opinion that the Federal Reserve should reduce its bond buying "now".

In an interview, the long-time critic of the U.S. central bank's quantitative easing program told Reuters he was comfortable with the recent rise in market interest rates as investors increasingly predict he and fellow policy-makers will reduce the pace of accommodation sooner rather than later.

Yields on U.S. government bonds rose again on Friday after the Labor Department's jobs market report showed employers in the United States stepped up hiring in May, adding 175,000 jobs.

"It shows that the fears of the sequester (spending cuts) and the layoffs, while they may be there, have not been as damaging yet to overall employment as some people had feared," Plosser said.

"We would all like it to be stronger but there's no reason for us to feel bad about the numbers that came out," which he said showed the economy produced jobs at a "moderate rate."

In pressing for a reduction in the Fed's bond purchases as soon as this month, Plosser is in the minority of the Fed's 19 policy-makers. The majority appear to still support buying $85 billion in Treasury and mortgage bonds per month to keep rates low to spur investment, hiring and overall economic growth.

Still, Fed Chairman Ben Bernanke and some others are increasingly, if tentatively, saying they could dial down the purchases in the months ahead if the economy continues to weather this year's higher taxes and some $85 billion in government spending cuts, known as the sequester.

Investors, anxiously trying to predict when the Fed will act, have boosted benchmark 10-year Treasury note yields by 0.3 percentage point since the beginning of May, leading some to fret over an abrupt and exaggerated rise when the Fed finally decides to adjust the current third round of its quantitative easing program, dubbed QE3.

Plosser, who regains a vote on the Fed's policy committee next year, said he was comfortable where things stood in the market, given the drop in unemployment and pick-up in economic growth since QE3 was launched in September.

"I don't think it's a bad thing to have longer-term rates back up a bit," he said. "That will help us down the road. It doesn't cause me a lot of angst."

A HAWK'S TO-DO LIST

In order to boost the slow and erratic recovery from recession, the Fed has said it will buy bonds until the labor market outlook improves substantially and keep interest rates low until the unemployment rate falls to 6.5 percent or so.

U.S. unemployment stood at 7.6 percent in May, up from 7.5 percent in April and high by historical standards. Inflation has also fallen well below the Fed's 2 percent target, giving doves at the Fed more reason to keep policy ultra easy.

Last month, Bernanke said the central bank could at the "next few meetings" reduce stimulus if the economy looked set to gain momentum, unleashing a selloff in stocks and bonds.

Plosser, a former economics professor who has headed the Fed's Philadelphia branch since 2006, expressed some frustration that his colleagues do not appear ready to adjust policy at their next scheduled meeting on June 18-19. The Fed needs to maintain its credibility by demonstrating it is "willing and able to pull back a bit," he said.

"I worry that the markets believe we don't have the capability or willingness to do that," he added. "We're just digging a deeper hole."

Yet asked by what amount he would like to see the asset purchases reduced, Plosser said there is no consensus among policymakers on that. "I don't think any of us know what the right increment is here," he said.

Ticking off his to-do list, he said policymakers must first decide to reduce purchases, then decide by how much, and finally select the type of bonds it will reduce, repeating that he would prefer first tapering mortgage-backed securities buying.

Others, including Boston Fed President Eric Rosengren, have said MBS are a more efficacious asset to hold.

Turning to the Fed's longer-term plan for returning its balance sheet to a more normal size of around $1 trillion from $3.3 trillion now, Plosser said it was too early to adjust the so-called exit strategy at this month's meeting.

Such a move would only confuse things because it remains unclear how many bonds the Fed will ultimately buy, he said.

(Reporting by Jonathan Spicer Editing by Chizu Nomiyama and James Dalgleish)