Fed may need to halt QE3 before jobs market heals - minutes

By Alister Bull and Pedro da Costa

WASHINGTON (Reuters) - The U.S. Federal Reserve may have to slow or stop buying bonds before seeing the pickup in hiring the bold program is designed to deliver, a number of Fed officials felt last month, according to minutes of the central bank's January policy meeting.

"A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the (policy-setting) committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred," the minutes released on Wednesday said.

The Fed voted last month to maintain its third round of so-called quantitative easing, or QE3, at a $85 billion monthly pace, and said it would buy bonds until it saw a substantial improvement in the outlook for the labor market, which remains under pressure with the jobless rate at 7.9 percent rate.

The U.S. economy braked sharply in the final quarter of 2012 but investors are confident it will rebound this year and Fed officials last month voiced confidence that despite a pause, "the economy remained on a moderate growth path."

The dollar rose, U.S. stocks extended losses slightly and U.S. government bonds pared gains after the minutes were released.

Although the minutes said that many officials voiced concern last month over potential costs of further asset purchases, that hawkish tone was balanced somewhat by a warning about the dangers of ending the bond-buying program prematurely.

"Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant," the Fed said.

A number of the officials on the 19-strong committee also floated another suggestion - that the Fed hold on to the bonds it has bought for longer than currently planned to deliver more monetary stimulus, either to supplement or replace the bond purchases.

Gennadiy Goldberg said the minutes showed that a "lively discussion" on the costs and benefits of the Fed's bond buying program was continuing.

"There is no chance they are going to lift the foot and slam on the brakes immediately," Goldberg said. "If worse comes to worse we'll get a tapering, if things start to improve substantially, which we'll have to wait until later in the year to see."

The Fed has more than tripled the size of its balance sheet since 2008 to around $3 trillion through bold purchases of bonds designed to hold down the cost of long-term borrowing and spur a stronger recovery.

The Fed has said it will reduce the size of its balance sheet when the time comes to tighten monetary policy. (Reporting by Alister Bull and Pedro da Costa; Editing by Neil Stempleman and Tim Ahmann)