U.S. Fed's Lockhart gives cautious backing to more QE cuts

ATLANTA (Reuters) - A top U.S. central banker on Monday cautiously endorsed further cuts to a stimulative bond-buying program, warning the labor market has not yet healed and that there are worrisome signs of disinflation in the economy.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in a speech "very accommodative" monetary policy remains appropriate despite his predictions for a pick-up in economic growth and a gradual rise in inflation this year.

"If all goes as expected, there is a policy transition under way from a QE world, so to speak, to a post-QE world," he said of the Fed's bond-buying program, known as quantitative easing or QE.

But "both the employment picture and the inflation state of affairs have worrisome aspects," he added, according to remarks to the Rotary Club of Atlanta.

In a nod to better jobs growth, the Fed last month trimmed its asset purchases by $10 billion to $75 billion per month. Those purchases, along with near zero interest rates, are meant to spur investment and spending that will boost hiring and growth.

Chairman Ben Bernanke has suggested the Fed would take similar, measured steps to wind down the purchases throughout the year - which most economists have taken to mean $10 billion increments at each policy meeting.

Lockhart, a centrist at the central bank who does not have a vote on monetary policy this year, predicted 2.5 to 3.0 percent gross domestic product growth this year, up a bit from 2013. If that plays out, "I would support similar tapering steps over the course of this year," he said of the pace of QE.

U.S. unemployment sharply dropped to 6.7 percent in December from 7.0 percent. But "the labor market is not as healthy as the improved unemployment rate might indicate," Lockhart said. "The unemployment rate drop may overstate progress achieved."

Highlighting weak wage growth and a high degree of labor market dropouts, he added there remained a "substantial employment gap" that could be helped by easy Fed policies.

The Fed has said it will keep rates at rock bottom well past the time unemployment falls below 6.5 percent, especially if inflation remains below its 2 percent target.

Lockhart said inflation "seems disconnected from the recent growth momentum," and warned that "continued disinflation could pose risks to economic performance."

(Reporting by Karen Jacobs; Writing by Jonathan Spicer; Editing by Andrea Ricci)