Markets might have gone too far on taper talk - U.S. Fed's Plosser

By Aaron Pressman and Svea Herbst-Bayliss

BOSTON (Reuters) - Investors may have overreacted recently to the possibility of the U.S. Federal Reserve winding down its asset-buying stimulus, a top U.S. central bank official said on Thursday.

U.S. bond and stock markets abruptly sold off on May 22 when Fed Chairman Ben Bernanke told a congressional committee that the central bank's $85 billion in monthly purchases could be reduced "in the next few meetings" of the Fed's policy committee if the economy continues to gain traction.

Asked if markets overreacted in general recently, Philadelphia Fed President Charles Plosser told reporters: "Maybe yes."

"Since I don't know what the outcome is going to be, the markets seem to take this very seriously at some level which I think is probably a mistake," added Plosser, a long-time critic of the quantitative easing program known as QE3.

Investors globally are anxiously predicting when the Fed will dial down the pace of its bond purchases, given improvements in the U.S. labor market since the program began in September, 2012, and given talk from some policy-makers that they could act this summer.

Ten-year Treasury yields have risen 0.38 percentage point since the beginning of May.

"We have to be careful not to allow ourselves to be whipsawed by market views of what the outcomes are going to be for them," Plosser added. "We shouldn't be thinking we can't do this because the markets would back up."

Plosser and other hawkish Fed policymakers are in the minority on when to lessen the monetary stimulus. Most economists don't expect the Fed to reduce the Treasury and mortgage bond purchases until September or later.

Still Plosser repeated the case that the central bank should make the move starting at its June 18-19 policy-setting meeting, where he said the option is "clearly on the table."

"It's time that we begin to gradually unwind ourselves," he said, adding QE3 "hasn't been really very instrumental in helping Main Street and the unemployment rate."

The jobless rate was 7.5 percent in April down from 8.1 percent before September when QE3 was launched. The jobless rate hit a crisis-era peak of 10 percent October 2009. Fresh labor-market figures for May are due from the government on Friday.

(Writing by Jonathan Spicer; Editing by Chizu Nomiyama and Carol Bishopric)