QE3 Cut May Make Sense—in a Few Months, Says Fed's Rosengren

The job market and overall economy may be strong enough in a few months to allow the Federal Reserve to pare its bond-buying program a bit, one of its most dovish policymakers said Wednesday.

Halting the Fed's monthly purchases of $85 billion worth of Treasurys and mortgage-backed securities would be "premature" now, Boston Federal Reserve Bank President Eric Rosengren told the Economic Club of Minnesota.

But, he added, "I would also say that it may be undesirable to abruptly stop purchases, so it may make sense to consider a modest reduction in the pace of asset purchases if we see a few months more of gradual improvement in labor markets and improvement in the overall growth rate in the economy."

Rosengren said such improvements are consistent with his current expectations.

Fed policy hawks have called for months for a reduction in its bond-buying program. But Rosengren's comments, hedged as they were, signal growing support closer to its policy-making core for possibly cutting monetary stimulus as early as this summer.

Financial markets have been pricing in a quicker end to the program since Fed Chairman Ben Bernanke said last week that a decision to scale back the program could come in the next few meetings of the central bank's policy-setting panel.

(Read More: Traders Overreact to Bernanke's Testimony)

Better-than-expected data from the housing sector and higher consumer confidence have also stoked such expectations.

Rosengren has been one of the most ardent supporters of the Fed's bond-buying program, now called QE3 as it is the third round of so-called quantitative easing since the Great Recession.

Two other top officials, policy centrist San Francisco Fed President John Williams and policy dove Chicago Fed President Charles Evans, also recently signaled their openness to a possible reduction in stimulus in coming months.

Still, not all policymakers are calling for a reduction in bond-buying. St. Louis Fed President James Bullard has said he wants to see inflation pick up before he would support reducing the bond buys.

The policy-setting panel, of which Rosengren is a voting member this year, meets June 18.

The Fed has said it will continue to buy assets until it sees substantial improvement in the labor market outlook. Rosengren repeated Wednesday that he does not believe the job market has reached that point.

"Significant accommodation remains appropriate at this time," he said, noting that unemployment, at 7.5 percent, is still "quite high" and that inflation is well below the Fed's 2-percent target.

The bond purchases should continue "until we see more sustained improvement in labor markets and have greater confidence that the economic recovery is sufficiently self-sustaining to yield continued progress in reducing the still very high unemployment rate," Rosengren said.

But he added that he is more confident that the unemployment rate will fall to 7.25 percent or a little below by the end of the year, a point at which he previously had said could mark a "substantially" improved jobs environment.

Acknowledging that his view is somewhat more optimistic than that of many private forecasters, Rosengren said he sees it as a "positive" sign that labor markets have improved despite headwinds from higher payroll taxes and other fiscal tightening.

Even if the Fed reduces the rate of bond-buying, it will be adding accommodation—just more slowly, he said.

The size of the Fed's balance sheet, currently $3.3 trillion, ultimately will depend on when the Fed brings the bond-buying program to an end.

Bond-buying's benefits significantly outweigh its potential costs, said Rosengren, adding that if conditions merit it, the Fed should also be willing to increase its purchases.