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Fed hawks, wielding votes, urge faster end to bond buying

Philadelphia Federal Reserve President Charles Plosser speaks at an Economics21 event in New York, March 25, 2011. REUTERS/Brendan McDermid
Philadelphia Federal Reserve President Charles Plosser speaks at an Economics21 event in New York, March 25, 2011. REUTERS/Brendan McDermid

By Ann Saphir and Jonathan Spicer

DALLAS/PHILADELPHIA (Reuters) - The Federal Reserve should bring its bond-buying program to a swift close, according to two of its most hawkish policymakers who take up voting power this year, with Dallas Fed chief Richard Fisher vowing to use his vote to support cuts to the program even if stocks, now near record highs, take a tumble.

The comments on Tuesday from Fisher and Charles Plosser, president of the Philadelphia Fed, come roughly two weeks before the U.S. central bank's first policy meeting of the year. They suggest that incoming Chair Janet Yellen will face internal pressure to ramp up withdrawal of the extraordinary stimulus, which policymakers last month decided to trim to $75 billion a month from $85 billion.

The Fed's third round of quantitative easing, the purchase of U.S. Treasuries and mortgage-backed securities known as QE3, is aimed at pushing down long-term borrowing costs in order to boost hiring and growth.

Outgoing Fed Chair Ben Bernanke, whose term expires just two days after January's policy meeting, said in December that the Fed would continue to pare purchases and end them later this year, as long as the economy continues to improved as expected.

Fisher and Plosser made it clear they would try to hold the Fed to that promise, with Fisher saying that not even a stock-market rout could convince him to hold off.

"Were a stock market correction to ensue while I have the vote, I would not flinch from supporting continued reductions in the size of our asset purchases as long as the real economy is growing, cyclical unemployment is declining and demand-driven deflation remains a small tail risk," Fisher told the National Association of Corporate Directors in Dallas.

"I would vote for continued reductions in our asset purchases, with an eye toward eliminating them entirely at the earliest practicable date," he said.

Still, while he said he would prefer the Fed slash its bond-buying more drastically -- by $20 billion a month, rather than the $10 billion cut decided on in December -- it was not clear that a difference of opinion on the pace of reductions would be enough to prompt him to dissent.

Treasuries added to losses after Plosser's and Fisher's remarks, sending yields up as investors priced in the potential for a faster end to QE3. Stocks ended the day higher, buoyed by strong retail sales.

A "HIGH BAR" TO HALT TAPER

Most expect the Fed to continue to trim the program by $10 billion a month at each of its upcoming policy-setting meetings.

"Let's see what pace we agree on - I don't want to prejudge that, the point is I want to continue this process," Fisher told reporters after his speech.

Speaking in Philadelphia, Plosser made a similar point.

"My preference would be that we conclude the purchases sooner than this," Plosser said, "but I am glad that we have taken the first step on the path to ending the program."

For him, he told reporters afterward, it would be a fairly "high bar" to halt the tapering of the purchases this year.

Plosser downplayed the weak December jobs report released on Friday and rebuffed concerns some of his colleagues have voiced over the large number of Americans who have dropped out of the work force.

"As we enter 2014, I think the bottom line is that the economy is on a firmer footing than it has been for the past several years," he told a luncheon at the ornate Union League of Philadelphia building in downtown Philadelphia.

Plosser predicted joblessness, at 6.7 percent in December, would fall to 6.2 percent by year end, from 6.7 percent last month.

He repeated expectations that inflation, now low at 1 percent, will rise toward the Fed's 2 percent goal through the year, and he reiterated a forecast for growth in gross domestic product of 3 percent.

Excessively low inflation and excessively high unemployment have prompted the Fed's very easy policies, including near-zero interest rates, now five years after the end of the Great Recession.

Policymakers such as Eric Rosengren, the dovish head of the Boston Fed, have warned against removing the stimulus too hastily because of fears it could permanently damage the labor market. The percentage of Americans who have dropped out of the workforce is at multi-decade highs.

In a move aimed at cushioning the market impact of withdrawing the bond-buying stimulus, the Fed said in December it would keep rates near zero until well past the time the unemployment rate falls to 6.5 percent.

It is "unwise" to adjust that so-called policy threshold, Plosser said on Tuesday. Some doves, including Rosengren, have pushed for a reduction in the unemployment threshold to assure investors the Fed is serious about keeping rates low.

Fisher said the Fed's low-rate guidance needs further discussion, but suggested he agreed to the low-rate vow as the trade-off for the decision to reduce bond-buying.

"I didn't find the 6.5 percent, or well past 6.5 percent, to be too high a price to pay for that cutback of $10 billion," he told reporters.

(Reporting by Ann Saphir in Dallas and Jonathan Spicer in Philadelphia; Editing by Leslie Adler)

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