Dallas Fed chief calls for end to bond purchases

The US Federal Reserve is closer to reducing its massive bond-buying program after the unemployment rate dropped last month, a top Fed official has said, adding that he wants reductions to start later this year.

The central bank has been buying $US85 billion ($95 billion) in long-term securities a month in order to keep interest rates low and boost hiring and investment. Fed chairman Ben Bernanke said in June that it would probably make cuts to the program later this year, with an eye to ending it by mid-2014, when unemployment will likely be about 7 per cent.

"With the unemployment rate having come down to 7.4 per cent ... 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," said Dallas Federal Reserve Bank president Richard Fisher.

He acknowledged that the program had helped buoy the housing market and the stockmarket.

But the idea that the buying would continue indefinitely could encourage improper allocation of capital, Mr Fisher said.

Mr 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.

Mr 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 per cent of US Treasuries and 25 per cent of all mortgage-backed securities, a "significant slice of these critical markets", he said.

When Mr Bernanke laid out the Fed's likely timeline for ending the bond-buying program, bond yields soared and stocks fell.

"When the time comes, we must ... gingerly unwind it so as not to prompt market havoc," Mr Fisher said. To calm markets, Fed officials have emphasised that an end to the bond-buying program did not mean the Fed would raise rates.

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