PHILADELPHIA Improved economic and labor market conditions suggest the U.S. central bank should set a fixed dollar amount on its current bond-buying program and end the program when that amount is reached, a top Federal Reserve official said on Monday.
"We cannot continue to play this bond-buying game by ear and risk the Fed's credibility while creating lingering uncertainty about the course of monetary policy," Charles Plosser, president of the Philadelphia Fed, said in an address to the Risk Management Association.
The Fed currently is buying $85 billion in Treasury and mortgage bonds per month in an effort to boost investment, hiring and growth. Started in September 2012, it is the Fed's third bond-buying program, but unlike the first two, it is the only one that is open-ended.
Together, the Fed's three bond-buying programs have ballooned the central bank's balance sheet to $3.7 trillion.
Plosser, who is not a voting member this year on the policy-setting Federal Open Market Committee, said stronger economic conditions are weakening the justification for ongoing purchases.
"I believe that labor markets have substantially improved from a year ago and that we should begin to wind down these asset purchases," he said, adding he sees the jobless rate, now at 7.3 percent, falling to 6.25 percent by the end of 2014.
He said the Fed's decision in September not to scale back the program hurt its credibility and undermined public confidence in the economy.
"Setting the ultimate size of our asset purchase program will lead us away from trying to fine-tune our decision about purchases based on the latest numbers and creating uncertainty from meeting to meeting about the FOMC's next step," he said.
"When we reach that amount, we should stop the asset purchases, and then reassess the state of the economy to determine if further action would be beneficial. At that point, monetary policy would still be highly accommodative."
The Fed has held interest rates at record lows near zero since late 2008. In deciding when to reduce the bond-buying program, the Fed has said it will watch to see that incoming data support its expectation for improved labor markets and higher inflation.
Plosser said recent data suggests the economy is experiencing a self-sustaining, if moderate, recovery.
"While economic growth has come in fits and starts, the underlying path is one of continued moderate expansion," he said, adding he expects gross domestic product growth of about 3 percent in 2014.
He said he expected inflation to drift back toward the Fed's 2 percent target over the next year.
Persistently below-target inflation rates have contributed to the Fed's decision to maintain aggressive stimulus and low interest rates.
Plosser, a known inflation hawk, last week said the Fed should concern itself only with fighting inflation, which he expects to move back toward the Fed's 2 percent target, and ditch a dual focus on stable prices and jobs.
(Reporting by Dan Kelley; writing by Steven C. Johnson; Editing by Leslie Adler)