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.
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"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.