Drop in jobless rate puts Fed closer to ending bond buys - Fisher

By Ann Saphir

PORTLAND, Oregon (Reuters) - The Federal Reserve is nearer to dialing back its massive bond-buying program after the unemployment rate dropped last month, a top Fed official said on Monday, adding that he wants reductions to start this fall.

The U.S. central bank is buying $85 billion in long-term securities each month in order to keep interest rates low and boost hiring and investment. Fed Chairman Ben Bernanke said in June that the Fed would probably make cuts to the program later this year, with an eye to ending it by mid-2014, when unemployment will likely be around 7 percent.

"Having stated this quite clearly, and with the unemployment rate having come down to 7.4 percent, I would say that the (Fed's policy-setting) committee is now closer to execution mode, pondering the right time to begin reducing its purchases, assuming there is no intervening reversal in economic momentum in coming months," Dallas Federal Reserve Bank President Richard Fisher said in remarks prepared for delivery to the National Association of State Retirement Administrators.

A government report on Friday showed that the jobless rate last month fell to 7.4 percent. The report came two days after the Fed ended its regular policy-setting meeting, at which it made no changes to its bond-buying program and gave no indication it was moving closer to reducing it.

The program has helped buoy the housing market and the public stock market, Fisher acknowledged.

But the false idea that the buying will continue forever can encourage improper allocation of capital, he said, and it is important to let the public know that the Fed will eventually end the program.

"In June, I argued for the chairman to signal this possibility at his last press conference and at last week's meeting suggested that we should gird our loins to make our first move this fall," Fisher said. "We shall see if that recommendation obtains with the majority of the committee."

Fisher is among the most hawkish of Fed policymakers, and his views are often at odds with those at the core of the Fed's policy-setting committee. He is not a voter on the committee this year.

Fisher has opposed the bond-buying program since its inception last September, arguing that it has not been very effective. He also said he was concerned the bond-buying could kindle future inflation or distort markets.

The Fed now owns about 20 percent of U.S. Treasuries and 25 percent of all mortgage-backed securities, a "significant slice of these critical markets," he said. "This is, indeed, something of a Gordian Knot."

Releasing that knot is a delicate task. When Bernanke laid out the central bank's likely timeline for ending the bond-buying program, bond yields soared and stocks tanked.

"When the right time comes, we must carefully remove the program's pole pin and gingerly unwind it so as not to prompt market havoc," Fisher said.

To calm markets, Fed officials have emphasized that an end to the bond-buying program does not mean the Fed will soon raise rates.

Fisher on Monday emphasized that point, noting that the Fed has pledged to keep rates near zero until the unemployment rate falls to at least 6.5 percent, as long as inflation remains reasonable.

About half of U.S. primary dealers - Wall Street banks that deal directly with the Fed -- believe the Fed will start reducing its bond purchases in September, with the other half expecting reductions later.

(Reporting by Ann Saphir; Editing by Andrea Ricci)