By Jonathan Spicer
JACKSON HOLE, Wyo., July 12 (Reuters) - The U.S. Federal Reserve should commit to tightening policy when the unemployment rate falls to a 6.5-percent 'trigger,' instead of just using that level as a rough guidepost for considering a rate rise, a top U.S. central bank official said on Friday.
The proposal by Philadelphia Fed President Charles Plosser runs against the grain of most other U.S. monetary policy-makers, who have increasingly stressed that interest rates could well stay near zero well after the U.S. jobless rate hits that level.
The Fed has held its key federal funds rate at rock bottom since late 2008 to help boost hiring and drag the economy from the Great Recession. Unemployment was 7.6 percent last month.
To clarify its future intentions and to give the economy even more support, the policy-making Federal Open Market Committee said in December the Fed would keep rates that low until unemployment falls to 6.5 percent, as long as inflation expectations do not rise above 2.5 percent.
Plosser, a hawkish Fed official who regains a vote on policy next year, said these so-called 'thresholds,' while an improvement, still leave too much room for interpretation. The Fed should 'commit to its forward guidance' by treating those levels as 'triggers rather than thresholds,' he said.
The 'FOMC has offered a variety of changing targets or signals about future behavior,' he said at the 5th Annual Rocky Mountain Economic Summit here.
'Although the aim was to clarify our policy intentions, I believe the repeated changes have likely caused more confusion than illumination,' Plosser told the conference hosted by the Global Interdependence Center.
The proposal may be a long shot, since influential officials have recently stressed the Fed is in no rush to raise rates.
On Wednesday, Fed Chairman Ben Bernanke renewed his message that policy would remain 'highly accommodative' and rates could well stay low even after the jobless rate falls below the threshold. 'There will not be an automatic increase in interest rates when unemployment hits 6.5 percent,' he said.
THE QUESTION OF QE3
Turning to the Fed's other accommodation effort, Plosser repeated the time has come to reduce, then end by the end of 2013, the bond-buying program known as quantitative easing, or QE.
'It is time to exit from the asset purchase program in a gradual and predictable manner,' he said. In an earlier interview with Bloomberg, Plosser said the tapering should begin at the Fed's September policy meeting, as opposed to the one scheduled for the end of July.
Investors are anxiously predicting when the Fed will reduce its $85 billion in monthly bond buys after Bernanke last month said the FOMC expects to taper the program later this year and end it altogether by mid-2014, as long as the economy strengthens as expected.
In a client note titled 'Dovish Plosser remarks?', JPMorgan chief U.S. economist Michael Feroli said, 'given Plosser's reliable uber-hawkishness, what is perhaps more surprising is that he didn't call for a sooner start to tapering ... at the late July meeting.
'(I)f even Plosser doesn't want to act at the July meeting, we can pretty much rule out there being much support for an earlier action,' Feroli said.
Since Bernanke articulated the QE timeline on June 19, Wall Street economists have increasingly predicted the Fed will reduce the pace of QE in September.
Also since June 19, longer-term market-based yields have risen sharply before more recently shedding some of those gains.
James Bullard, head of the St. Louis Fed, said on Friday the substantial rise in bond yields since last month is not justified by an improvement in U.S. economic data or a rise in inflation, warning it reflects optimism that may prove to be too rosy.
'Recent FOMC decisions have met with a substantial rise in Treasury yields, and I have suggested that a possible justification for the rise in yields is increased optimism concerning future U.S. macroeconomic performance,' Bullard told the same conference.
'However, given recent forecasting performance, we should be careful in using an optimistic forecast to justify current policy decisions. A more prudent approach would be to wait to see if better macroeconomic outcomes materialize in the months and quarters ahead,' he said.
Benchmark 10-year Treasury notes slipped on Friday, with the yield rising to about 2.6 percent.
(Additional reporting by Alister Bull in Washington; Editing by Chizu Nomiyama) Keywords: USA FED/
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