By Alister Bull
KANSAS CITY, Missouri (Reuters) - The Federal Reserve should start cutting its massive bond-buying program in September and bring it to an end in the first half of next year, the hawkish president of the Kansas City Federal Reserve Bank said on Tuesday.
"I would like to see the FOMC begin to systematically reduce the pace of purchases in a manner that brings the program to an end some time during the first half of next year," said Esther George, referring to the policy-setting Federal Open Market Committee.
Fed Chairman Ben Bernanke said last month the U.S. central bank would likely start to reduce its monthly $85 billion of bond buying later this year and probably bring it to a close by mid-2014 when the unemployment rate will likely be around 7 percent.
George, an FOMC voter this year who has dissented at every meeting, signaled comfort with the plan laid out, even though she had said in an earlier interview with Fox Business Network that it was already time to dial down the purchase pace.
"If the unemployment rate falls as expected and inflation moves toward the (Fed's) 2 percent goal, reducing the pace of purchases in September and ending them next year is appropriate," George said at an agricultural conference.
On the other hand, she said it might make sense for the Fed to move faster if the jobless rate comes down at a quicker-than-expected clip.
PULL THE TRIGGER
George has dissented repeatedly over concern that asset buying could foster future financial instability and risk the central bank's anti-inflation credentials, earning her a reputation as one of the Fed's most hawkish officials.
The Fed has been buying $85 billion in Treasuries and housing-backed securities since last September to push down long-term borrowing costs and boost investment and hiring.
When it began the program the jobless rate was about 8.1 percent. The most recent reading, for June, was 7.6 percent.
Bernanke testifies before Congress on Wednesday and Thursday, and is expected to stick by his outline for a tapering of the Fed's bond buying, while underscoring that a tapering of purchases does not equate to a tightening of monetary policy.
He is also expected to hammer home the message that the Fed expects to keep overnight interest rates near zero, where they have been since late 2008, for a considerable period after the asset buying ends.
The Fed has said it will hold benchmark rates steady at least until the unemployment rate hits 6.5 percent, provided the outlook for inflation does not rise above 2.5 percent.
Bernanke has been at pains to make clear to financial markets that this is a threshold to consider action, not a trigger for an automatic rate hike. According to Fed forecasts, 14 of its 19 policymakers do not expect to increase rates until 2015.
George, however, went out of her way to stress that she would like the Fed to begin raising interest rates as soon as unemployment hits 6.5 percent, joining fellow hawk Charles Plosser, president of the Philadelphia Fed.
"My own view is that these thresholds should act similar to triggers. So once the (unemployment) rate nears 6.5 percent, markets and the public should expect lift-off of short-term interest rates," she said.
Global markets reacted violently to Bernanke's announcement last month that the days of the Fed's bond purchases were likely numbered. Stocks swooned and bond yields shot higher, taking mortgage rates up with them.
Stock prices have since recovered and are back near record highs, as investors judged that equities will be able to rally through a reduced level of Fed monetary policy stimulus.
Bond yields have also stabilized, but the yield on the benchmark 10-year U.S. Treasury note remains around 1 percentage point higher than year lows in April of around 1.6 percent.
George acknowledged the jump in longer-term rates as markets adjusted to the reality that asset purchases could not go on forever.
But she said that this was not all bad, noting it could improve bank interest margins "without having to resort to increasing the amount of risk they take on their balance sheets, thereby supporting financial stability."
(Reporting by Ann Saphir and Alister Bull; Editing by Chizu Nomiyama, David Gregorio and James Dalgleish)