* Don't taper until inflation heading higher, Bullard says
* Plosser floats capping on asset purchases to ease exit
* Lacker, another hawk, urges Fed to draw down QE
ST. LOUIS/NEW YORK, Nov 1 (Reuters) -
Top Federal Reserve officials on Friday gave only modest hints as to when a massive bond-buying program would be drawn down, with one saying they needed to wait for signs of rising inflation and two others reinforcing an argument the Fed has waited too long.
Investors are trying to predict when the Fed will decide the U.S. economy and labor market are strong enough to withstand a reduction in the pace of quantitative easing (QE), in which $85 billion in assets are snapped up by the central bank each month to spur growth.
The Fed, which has held interest rates near zero since late 2008 and quadrupled the size of its balance sheet to $3.8 trillion, opted this week to extend its policy support after a series of soft readings on the economy.
St. Louis Fed President James Bullard, who backed the decision, said the huge balance sheet has created risks of financial instability and said officials would like to "get out of the uncharted territory if we can."
But annual inflation, which was 1.2 percent in August according to the Fed's preferred measure of price pressures, remained too far beneath the central bank's self-imposed 2 percent medium-term goal, he said.
"I would like to see inflation coming back toward target before we make a decision to taper," said Bullard, who is generally viewed as a policy centrist. "If we could see it coming back, get some evidence that it was coming back toward target, I think that would be helpful if we wanted to make a decision."
Economists now think the Fed will wait until 2014 before starting to wind down asset purchases, although a clear improvement in economic indicators in the next two months could revive prospects for action at the Fed's December 17-18 meeting.
Bullard, attending a St. Louis Regional Chamber Financial Forum, declined to say if he thought it would be too soon to make the call on QE at that meeting.
"I would not want to speculate on what the committee will do in December," he told reporters after speaking with a financial advisers forum. "I have been an advocate that we keep our options open at every meeting."
SLAP A CAP ON QE?
While the majority of Fed policymakers, including Chairman Ben Bernanke, are in Bullard's camp, a minority of them worry the costs of such unprecedented stimulus outweigh the benefits. These so-called hawks have long pushed for a reduction in QE.
"On a number of different dimensions for me personally it looks like labor force conditions have improved pretty significantly" since the latest bond-buying program was launched in September, 2012, said Richmond Fed President Jeffrey Lacker.
"The cumulative fall in the unemployment rate, the cumulative increase in employment are the key things," he added at a Philadelphia meeting of the Global Interdependence Center.
In deciding when to reduce the program, the Fed has said it will watch that economic data support its expectation for improvement in the labor markets and higher inflation.
Another senior policymaker, Philadelphia Fed chief Charles Plosser, told CNBC television that one way to exit from bond buying would be to adjust the open-ended nature of the program by announcing the total amount that would be bought.
"I'm actually leaning to believe that's a better way to get out of this," Plosser said, adding a cap on QE would allow the Fed to reassess the economy once it is done.
"It would be worthwhile for us to consider how do we get out of this ... program in a sensible way without confusing it with our interest rate forward guidance."
Bullard said he did not support this approach, warning it would be impossible to know how the economy would be faring as buying came to an end, which would complicate communication. But he also stressed forward guidance.
The Fed has also promised to hold rates ultra-low at least until unemployment drops to 6.5 percent, provided the outlook for inflation remains under 2.5 percent. The U.S. jobless rate was 7.2 percent in September.
Addressing the low labor participation rate - Americans either with a job or actively searching for one - Lacker said it is likely due more to demographic factors, like an aging population, than to more cyclical factors that will eventually lead to a rebound.
"This sense that real GDP growth is going to pick up soon - I'm very skeptical about that," he said. "I see 2 percent growth ahead."
The Fed's policy-setting committee expects 2.9-3.1 percent growth next year, and 3.0-3.5 percent growth in 2015.
The committee argues reducing bond buying will not alter the commitment to keep rates near zero, and a majority of officials forecast the first rate hike will not happen until 2015.
But financial markets have reacted sharply when the Fed has talked about changing the pace of buying, and Bullard said it was going to be challenging to sever the relationship.
"The Committee needs to either convince markets that the two tools are separate, or learn to live with the joint effects of tapering on both the pace of asset purchases and the perception of future policy rates," Bullard told the financial advisors.