WRAPUP 1-Fed tapering still on track, hawk and dove agree
* Fed hawk George urges taper to $70 bln in September
* Dove Evans says has open mind on September move
* Says will scrutinize evidence of durability of recovery
OMAHA, Neb./GRENVILLE S.C., Sept 6 (Reuters) - One of the Federal Reserve's most hawkish officials urged the central bank on Friday to curb bond buying to $70 billion a month when it meets later this month, while a noted policy dove agreed that the Fed could start to taper later this year.
Expectations for a modest cut in the U.S. central bank's monthly bond purchases at the upcoming meeting were mostly intact after a mixed August payroll report, released earlier on Friday.
Most economists at U.S. primary dealers expect the Fed to ease back on stimulus after the Sept. 17-18 discussions, according to a Reuters poll which showed such bets had firmed in the last month.
Esther George, the Kansas City Fed's consistently hawkish leader, said she favored trimming bond purchases from their current $85 billion a month when policymakers next meet.
But Chicago Fed President Charles Evans, like George a voter on the policymaking committee this year, stressed a move to taper was not a done deal. He would weigh other evidence about the durability of the economic recovery, although he said he could be swayed toward a pullback.
"This is a period where it's even more important to go into an FOMC meeting with an open mind," said Evans, referring to the central bank's policy-setting Federal Open Market Committee.
"There's been cumulative progress on the economy. I can be persuaded that there has been enough improvement," he told an audience in Greenville, South Carolina.
Financial markets are focused on the policy meeting on Sept. 17-18 for a small start to a tapering in the purchases. The Fed expects to halt these by mid-2014, when it forecasts that the U.S. unemployment rate will be around 7 percent.
Evans, a monetary policy dove who has tended to downplay inflation concerns, said it was disappointing to see labor force participation fall again, a sign that the jobless rate could be going down because of discouragement rather than hiring.
"The U.S. economy has a long way to go to return to healthy normalcy," Evans said, adding the economy is still around 5 million jobs short of where it should be at this point.
In fact, data released by the U.S. government earlier on Friday showed the unemployment rate creeping toward that target, with a decline to 7.3 percent in August, a 4-1/2 year low.
However, firms only added 169,000 new jobs last month, compared to a Reuters forecast for a 180,000 advance in the crucial monthly non-farm payroll report, and economists said the jobless rate drop was for the wrong reasons.
They cited a further retreat in labor participation, which has dwindled to its lowest rate since 1978 as discouraged workers gave up the search for employment.
TAPER TO $70 BILLION
Kansas City's George said that she also saw some good signs in the numbers, citing an improvement in wages and the number of hours worked, and reiterated her view that it was time to taper.
"An appropriate next step toward normalizing monetary policy could be to reduce the pace of purchases from $85 billion to something around $70 billion per month," George told a luncheon of business and community leaders -- a level which would be in line with the forecasts of primary dealers in the Reuters poll.
Furthermore, remaining Fed purchases should be split evenly between Treasuries and mortgage-backed securities, she said.
"A decision to reduce the Federal Reserve's monthly asset purchases would be appropriate at that (Sept. 17-18) meeting, as would clearer guidance about the path forward. It is time to begin a gradual - and predictable - normalization of policy."
George has dissented at every meeting since January in favor of winding back the U.S. central bank's aggressive bond purchase program. She worries that it could spur financial instability.
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