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Fed's Rosengren: 'Modest' QE3 cut may make sense in a few months


By David Bailey

MINNEAPOLIS (Reuters) - The U.S. job market and the economy as a whole may be strong enough in a few months' time to allow the Federal Reserve to pare its bond buying by a small amount, one of the Fed's most dovish policymakers said on Wednesday.

Halting the Fed's monthly purchases of $85 billion worth of Treasuries and mortgage-backed securities would be "premature" at this time, Boston Federal Reserve Bank President Eric Rosengren said in remarks prepared for delivery to the Economic Club of Minnesota.

But, he added, "I would also say that it may be undesirable to abruptly stop purchases, so it may make sense to consider a modest reduction in the pace of asset purchases if we see a few months more of gradual improvement in labor markets and improvement in the overall growth rate in the economy."

Rosengren said such improvements are consistent with his current expectations.

While Fed policy hawks have for months called for a reduction in the Fed's bond-buying program, Rosengren's comments Wednesday, hedged as they were, signal growing support closer to the Fed's policy-making core for a possible cut in the monetary stimulus as early as this summer.

Indeed, financial markets have been pricing in a quicker end to the bond-buying program since Fed Chairman Ben Bernanke last week said that a decision to scale back the program could come in the next few meetings of the Fed's policy-setting panel <ID: L2N0E319C>

Better-than-expected data from the housing sector, and improving consumer confidence, have also stoked such expectations.

Rosengren has been one of the Fed's most ardent supporters of its bond-buying program, known as QE3 because it is the Fed's third round of so-called quantitative easing since the Great Recession.

Two other top Fed officials, policy centrist San Francisco Fed President John Williams and policy dove Chicago Fed President Charles Evans, have also recently signaled their openness to a possible reduction in stimulus in coming months.

Still, not all policymakers are calling for a reduction in bond-buying.

St. Louis Fed president James Bullard has said he wants to see a pickup in inflation before he would support reducing the pace of the Fed's bond buys.

The Fed's policy-setting panel, of which Rosengren is a voting member this year, next meets June 18-19.

The Fed has said it will continue to buy assets until it sees substantial improvement in the labor market outlook Rosengren on Wednesday repeated that he does not believe the job market has yet reached that point.

"Significant accommodation remains appropriate at this time," he said, noting that unemployment, at 7.5 percent, is still "quite high," and inflation is well below the Fed's 2-percent target.

The Fed should continue with its bond-buying "until we see more sustained improvement in labor markets and have greater confidence that the economic recovery is sufficiently self-sustaining to yield continued progress in reducing the still very high unemployment rate," he said.

But Rosengren also said he has increasing confidence that the U.S. unemployment rate will fall to 7.25 percent or a little below by the end of the year, a point at which he previously had said could mark a "substantially" improved jobs environment.

Rosengren said his view is somewhat more optimistic than that of many private forecasters, but that he sees it as a "positive" sign that labor markets have improved despite headwinds from higher payroll taxes and other fiscal tightening.

Even if the Fed reduces its rate of bond-buying, the U.S. central bank will still be adding accommodation, albeit at a slower pace, he said. Ultimately the size of the Fed's balance sheet, at $3.3 trillion currently, will depend on when the Fed brings its bond-buying program to an end.

So far the benefits of the bond-buying significantly outweigh its potential costs, Rosengren said. And should conditions merit, the Fed should also be willing to increase its purchases, he said.

(Reporting by David Bailey; writing by Ann Saphir; Editing by Chizu Nomiyama)