The U.S. Federal Reserve will probably reduce its massive bond-buying stimulus program later this year, and depending on the economic data could do so as early as next month, a top Fed official who is typically among the most dovish policymakers said on Tuesday.
"We are quite likely to reduce the flow of purchases rate starting later this year - I couldn't tell you exactly which month that will be - and it's likely to wind down over time in a couple or few stages," Charles Evans, president of the Chicago Federal Reserve Bank, told reporters at the regional Fed bank's headquarters.
Asked if he would rule out starting the cutbacks next month, Evans said he "clearly" would not, becoming the third Fed official in two days to suggest a September pullback is on the table.
Still, Evans, who is a voting member of the Fed's policy-setting committee this year, said the U.S. central bank would keep short-term interest rates near zero until unemployment falls below 6.5 percent, which he expects could happen in mid-2015. As a result, rates could stay low for a year, or more, after the bond-buying program ends, he said, though that timeframe could be shorter if economic growth goes "roaring along" at more than 3.5 percent.
He also said that if inflation continues to stay well below the Fed's 2 percent target, the U.S. central bank could keep rates low even after the jobless rate falls below the 6.5 percent threshold. And in what he called the unlikely event that inflation remains stuck at uncomfortably low levels, Evans said rates could stay low even after the jobless rate falls below 6 percent.
All told, Evans said, the Fed's third round of quantitative easing, or QE3, will likely total at least $1.2 trillion since January 2013, double the size of the Fed's prior round of purchases.
"That's quite substantial," he said. "Even if we were to start in September it seems to me it would be quite unusual if we didn't have a program of that size."
The other two Fed officials this week to signal the possibility of a September pullback on bond purchases are Richard Fisher, president of the Dallas Fed, and Dennis Lockhart, head of the Atlanta Fed. Fisher on Monday said he would prefer to start cutting back on bond-buying next month, while Lockhart said on Tuesday that the Fed could make reductions starting in September, or wait longer if economic growth fails to pick up.
When and by how much the Fed will reduce its bond-buying program, which is aimed at pushing down long-term borrowing costs and thus spurring hiring and investing, is a subject of intense market speculation. Economists at about half of Wall Street's most influential banks see the Fed starting to pull back on purchases next month, with most of the rest forecasting cuts by the end of the year.
NEW VIEW ON JOBS VS BOND-BUYING
Evans said he expects the economy to grow about 2.5 percent in the second half of this year, and more than 3 percent next year. That rate of growth should generate about 175,000 to 200,000 jobs a month and will probably bring the unemployment rate down to about 7.2-7.3 percent by the end of the year, he said.
The latest government report showed that unemployment fell to 7.4 percent last month.
Fed Chairman Ben Bernanke said in June that the Fed could start to reduce bond purchases later this year, with an eye to ending them by the middle of next year, when the jobless rate is likely to be about 7 percent.
Evans said his outlook for the asset-purchase program is consistent with Bernanke's timeline, even though he has had to mark down his economic growth forecast for the year after sluggish first-half growth.
Evans also backed down from his earlier view that the economy would need to add at least 200,000 jobs each and every month for six months before he would support ending the bond-buying stimulus.
"I have to admit I have sort of rethought that a little bit," he told reporters, saying that more people were leaving the workforce than he had expected, resulting in a quicker drop in the jobless rate than he would have thought, given still modest growth.
But, he said, if headwinds from domestic fiscal contraction and the European economic slowdown abate, the "updraft" from an improving housing market should help fuel U.S. growth, despite a jump in mortgage rates after Bernanke in June signaled that a reduction in bond-buying could come over the next several months.
Evans acknowledged his surprise at the move in market rates, saying it appeared that some market participants must have thought the Fed would be even more accommodative than Evans himself, one of the Fed's most dovish policymakers, had ever envisioned.
But because so many homeowners have already refinanced their mortgages and more will be able to do so at still-low rates, Evans said the sharp rise in long-term rates since Bernanke's comments probably will not hold back the economy very hard.
Another regional Fed policymaker, Narayana Kocherlakota, president of the Minneapolis Fed, has called for the Fed to spur the economy further by lowering its threshold for considering a hike in rates to 5.5 percent unemployment, near the economy's long-term normal rate.
Evans said the Fed is already open to keeping rates low well beyond the current 6.5 percent threshold, but if Fed officials thought it would be useful to lower the threshold, he would not have a problem with doing do.
(Reporting by Ann Saphir; Editing by Leslie Adler)