UPDATE: Fed's Plosser Wants Bond-Buying Effort to Be Wound Down

(Adds comments on policy making.)

By Michael S. Derby

LANCASTER, Penn.--The Federal Reserve should be moving to put an end to its aggressive bond-buying program, given the rising odds that such a monetary policy stance will cause economic trouble, a top Fed official said Wednesday.

The current state of "monetary policy is posing risks to the economy in terms of financial stability, market functioning, and price stability," Federal Reserve Bank of Philadelphia President Charles Plosser said.

"In light of what I believe are meager benefits, should economic conditions evolve as I currently anticipate, I believe we should begin to taper our asset purchases with an aim of ending them before year-end," the official said in a speech given to a local business group in Lancaster, Penn.

Mr. Plosser isn't currently a voting member of the monetary policy setting Federal Open Market Committee. Since last autumn, the central bank has been pursuing an open ended campaign of Treasury and mortgage bond buying that is growing the Fed balance sheet, in a bid to spur growth and drive down unemployment. Most market participants expect the Fed's bond buying to continue through most of the year, potentially spilling over into 2014. Officials close to Fed Chair Ben Bernanke have offered support to that view.

Mr. Plosser and several other regional Fed bank presidents remain uncomfortable with the current outlook. These officials would like to see the Fed shrink the monthly bond buying sizes as a prelude to ending the purchases all together. A common theme among the Fed's dissidents is a belief that continued stimulus at the current pace risks unsettling markets and creating the sort of financial imbalances that could cause great harm to an economy already growing at a very modest pace.

"We do not want monetary policy to sow the seeds of financial instability," Mr. Plosser warned. "The intention of accommodative monetary policy is to ease credit conditions so that risk-taking and investment increase," he said, warning "there can be too much of a good thing with interest rates as low for as long as they have been."

The central banker noted that his discomfort over the Fed's policy is in part rooted in how he views ideal policy making. "I really do try to focus on the longer term" when thinking about the right outlook for monetary policy, Mr. Plosser said. "What you do today has consequences for the long term," and that is an idea that can be forgotten by policy makers, he said.

Mr. Plosser also said that the very low rates the Fed currently has in place may be dampening recovery because meager returns are forcing savers to stock away more than they would in a normal interest rate environment.

The veteran policy maker expects to see better growth looming ahead. He sees U.S. GDP rising 3% this year and the next. "Prospects for labor markets will continue to improve only gradually, but I believe we may see rates near 7% by the end of this year," compared with their current level of 7.9%, he said.

While he warned that policy mistakes can quickly cause confidence in a low inflation environment to fall apart, he doesn't see price pressures breaking out soon. "I believe inflation expectations will be relatively stable and inflation will remain at moderate levels in the near term," Mr. Plosser said.

But he also said "preserving price stability, in my view, is the most important function of a central bank." Mr. Plosser added that to achieve his expected inflation environment, "the FOMC will likely need to begin stepping back from the extraordinary accommodation it has been applying."

Write to Michael S. Derby at michael.derby@dowjones.com

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