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Fed should telegraph QE reductions, says Lockhart

Once the Federal Reserve finally trims its bond-buying program, it should then commit to an effective schedule that would wind it down completely, a top US central banker said on Thursday. Atlanta Fed President Dennis Lockhart sounded more upbeat on the prospects for the US economy when he said in a speech it was reasonable for investors to expect the Fed's asset-purchase policy to be wound down over the coming year.

The Fed should consider taking the first step in reducing its $85-billion monthly bond-buying program, known as quantitative easing, at a meeting this month and at the upcoming meetings of its Federal Open Market Committee given the overall positive economic activity of late, he said. The comments put Lockhart - a centrist at the central bank who does not have a vote on monetary policy this year - in sync with at least two other top officials who want to better telegraph how the Fed's unprecedented support for the US economy will be withdrawn.

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

A fresh reading on US gross domestic product growth on Thursday showed the economy grew at a strong 3.6 percent in the third quarter, up from a previous reading of 2.8 percent and the biggest jump since the beginning of last year. Talking to reporters, Lockhart downplayed the reading saying "it doesn't make a trend and ... doesn't drive me to the conclusion that we've had a breakout in terms of growth."

Yet with unemployment having fallen to 7.3 percent from a post-recession high of 10 percent in 2009, financial markets are now 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. Earlier this year, when Chairman Ben Bernanke signalled 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.

Lockhart 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 QE 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," Lockhart said.

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. Lockhart's embrace suggests the idea may be gaining traction ahead of a much-anticipated December 17-18 Fed policy meeting.

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 labour market outlook. The government will release data on November jobs growth on Friday, following a better-than-expected increase in hiring in October.

Copyright Reuters, 2013