By Ann Saphir
CHICAGO (Reuters) - A top Federal Reserve official, who has been one of the most ardent supporters of the U.S. central bank's bond-buying stimulus program, said he was open to curtailing the purchases this month, although he would prefer to wait.
The comments from Charles Evans, the president of the Federal Reserve Bank of Chicago, suggest a strong report on November jobs growth on Friday has brought the Fed closer to reducing its third round of quantitative easing, known as QE3.
U.S. nonfarm payrolls expanded by a greater-than-expected 203,000 jobs in November, with the unemployment rate dropping to a five-year low of 7 percent.
"I'll be open-minded," Evans said in an interview with Reuters Insider, when asked whether he would support trimming the Fed's stimulus at its policy meeting on December 17-18.
"Everything else (being) equal, I would like to see a couple of months of good numbers. But this was improvement."
The jobs data cheered Wall Street. The Standard & Poor's 500 Index broke a five-day losing streak and ended Friday's session with a gain of 1.12 percent gain. U.S. government bond prices were little changed.
It also led economists to move forward their expectations for when the Fed would begin to taper its purchases of $85 billion a month in bonds. A Reuters poll of top bond dealers found that four of them now expect the central bank to trim its purchases this month, and five look for a move in January, while eight see them holding off until March.
One of Evans' colleagues, Charles Plosser, the president of the Federal Reserve Bank of Philadelphia, said the November jobs report was more evidence that the U.S. central bank should end the bond-buying program.
"The sooner we can end this thing, the better," said Plosser, a longtime critic of the Fed's stimulus program.
The Fed's bond purchases are aimed at holding down long-term borrowing costs to make it cheaper for businesses to invest and workers to buy homes. After several years of slow, steady job growth and growing concerns that the asset purchases might be fueling bubbles in some corners of the economy, Fed officials are actively debating winding them down.
While Plosser has opposed the latest bond-buying program from its start in September 2012, Evans has been an outspoken advocate for all of the U.S. central bank's efforts to nurse the economy back to health following the 2007-09 recession.
Evans is a voting member on the policy-setting Federal Open Market Committee this year. Plosser will become a voting member of the FOMC in 2014.
LOWERING THE BAR
In the interview, Evans reiterated his view that the central bank should provide more clarity about the future path of overnight interest rates, which could help temper any adverse financial market reaction when it starts tapering its bond purchases.
One way to do this, he said, would be for the Fed to promise not to raise rates until the U.S. unemployment rate falls to 6 percent. The Fed has pledged to keep rates near zero, where they have been since late 2008, until the jobless rate hits 6.5 percent, as long as inflation does not threaten to rise above 2.5 percent.
If policymakers lowered the threshold on the jobless rate at the same time as they start to reduce bond purchases, he said, the central bank would be "maintaining the same level of accommodation."
Half of the bond dealers surveyed by Reuters on Friday thought the Fed would reduce the unemployment threshold where the Fed would first consider raising rates.
Evans also said that the Fed could use stronger language to describe how long it expects to keep rates low, a tactic that he put to use later in the day.
"I can't imagine" raising short-term rates even when unemployment falls to 6.25 percent, he told reporters after a speech.
Earlier this year, when Fed Chairman Ben Bernanke signaled that the central bank was thinking about winding down the bond buys, investors pushed up borrowing costs so much that policymakers worried this could undercut the still fragile recovery.
Startled officials have since stressed that reducing bond buying does not mean that they plan to raise rates any time soon, and Evans said markets were getting that message.
"The key thing is to provide a sufficient amount of confidence to the public and the markets that we are going to continue to provide as much accommodation as is necessary," he said.
Evans said lowering the jobless rate threshold could help convince financial markets that the Fed is serious about keeping rates low even after the bond buying stops.
LOOKING FOR THE EXIT
While Evans said he was encouraged about progress on the jobs front, he added that he was "certainly nervous" about inflation that continues to run well below the Fed's target of 2 percent.
In the year through October, the gauge of inflation targeted by the Fed rose just 0.7 percent. Another reading that strips out food and energy rose a little more quickly, gaining 1.1 percent. Evans said this core reading was a better measure of the inflation outlook, but it was troubling, nonetheless.
"We need to defend our inflation goal from below as well as from above," Evans said.
He also lowered his forecast for growth next year to between 2.5 percent and 3 percent from an earlier projection of more than 3 percent.
Evans sees the Fed's third round of stimulus - known as QE3 - totaling about $1.5 trillion, a figure that suggests that the U.S. central bank's bond buying will continue through next summer and perhaps into the fall, depending on how rapidly the Fed cuts the program once it begins to do so.
In remarks to reporters later Friday, Evans said he expects the Fed to have completed its bond-buying program by the time the unemployment rate falls to 6.5 percent. But he declined to say when that might be.
(Additional reporting by Jonathan Spicer in Philadelphia and Jason Lange in Washington; Editing by Jan Paschal)