Fed officials call for clear plan on wind down of QE3

COLLEGE STATION, Texas/FORT LAUDERDALE, Florida Thu Dec 5, 2013 4:06pm EST

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013.

Credit: Reuters/Jonathan Ernst

COLLEGE STATION, Texas/FORT LAUDERDALE, Florida (Reuters) - The Federal Reserve should telegraph the end of its current massive round of bond-buying by committing to a set schedule for the wind-down, two top policymakers said on Thursday.

Their embrace of the idea, after two others have publicly supported it in recent weeks, suggests it may be gaining traction ahead of a much-anticipated December 17-18 Fed policy meeting.

The Fed, frustrated with the slow and halting pace of recovery from the 2007-2009 recession, has kept interest rates near zero for five years and has swelled its balance sheet to nearly $4 trillion to spur investment, hiring, and growth.

Now that unemployment has fallen to 7.3 percent, from a post-recession high of 10 percent in 2009, financial markets are on edge about when the Fed will reduce its 15-month-old quantitative easing program, known as QE3 because it is the third such round.

A new read on the unemployment rate, for November, will be out tomorrow.

On Thursday, Atlanta Fed President Dennis Lockhart said the Fed should consider taking the first step in reducing its current $85-billion monthly bond-buying program at upcoming meetings, including December's, given the overall positive economic activity of late.

"Once the decision is made, I favor providing the public as much clarity and certainty as possible about how the change will be executed," Lockhart told a business organization in the beachside city of Fort Lauderdale, near Miami.

He said he was among those at the Fed's October policy meeting who, according to the minutes, wanted to "announce a total size of remaining purchases or a timetable for winding down the program" because a "calendar-based step-down" in the pace of bond-buying would help markets better predict it.

"It will be helpful to the transition process to provide as much certainty as possible about how this will be done," said Lockhart, a centrist along the Fed's policymaking spectrum.

Dallas Federal Reserve Bank President Richard Fisher, one of the central bank's most hawkish policymakers, likewise lent his support to a timed and predictable wind-down of a policy that Fisher personally has opposed from the first.

"We should define a very clear path: that is, once we start tapering, absent some major disruption or thing that comes out of the blue, a definite path as to when we reach zero," Fisher told reporters after a speech at Texas A&M University.

Doing so will provide markets the clarity they crave, he said.

The comments from Lockhart and Fisher are in sync with at least two other top officials who want to better telegraph how the Fed's unprecedented support for the U.S. economy will be withdrawn.

FORWARD GUIDANCE

Earlier this year, when Chairman Ben Bernanke signaled the Fed was starting to consider trimming QE, investors pushed up borrowing costs so fast that it threatened to undercut the still-fragile recovery.

Startled Fed officials have since stressed that reducing QE does not mean they will raise rates sooner than necessary.

Unlike the previous two rounds of QE, the Fed's third round of bond-buying is set up as "open-ended." Bernanke and other top officials have stressed the pace of purchases would be adjusted depending on economic data.

But San Francisco Fed President John Williams and then Charles Plosser of the Philadelphia Fed last month publicly embraced the idea of capping bond buys as a way to give investors clarity on the Fed's next steps and to shore up its credibility.

Turning to the question of when to reduce QE, Lockhart said it should be an option at that December meeting and at upcoming meetings "as long as the resulting overall posture of policy preserves a high degree of accommodation."

But he added: "If market expectations are that the asset purchase program will wind down over the coming year, I think that is reasonable."

Most economists think the Fed will hold off on a reduction to the bond-buying program until March, but some say December is not out of the question, especially if job creation picks up. The Fed has said it will keep buying bonds until there is substantial improvement in the labor market outlook.

The government will release data on November jobs growth on Friday. In October, there was a bigger-than-expected increase in hiring.

Lockhart also said the Fed should discuss adjusting its so-called forward guidance on when rates will finally rise, though he said he hasn't made up his mind on what steps if any would be best.

Fisher, for his part, said he would not support reducing the Fed's current threshold of 6.5 percent unemployment as a point at which it could start to consider raising rates.

(Writing by Ann Saphir; Editing by Andrea Ricci)

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