NEWPORT NEWS, Virginia (Reuters) - The U.S. Federal Reserve should begin reducing purchases of mortgage bonds, part of its monetary stimulus program, at its meeting next month, Richmond Fed President Jeffrey Lacker said on Thursday.
The outlook for the U.S. labor market had improved substantially since the Fed launched its most recent bond-buying stimulus last year, meeting the central bank's stated precondition for a retreat from such purchases, Lacker said.
"Personally, I opposed the purchase programs when they originated last September, so I was ready for tapering last October," he told students at Christopher Newport University in response to questions from the audience.
"We've seen a substantial improvement in labor market conditions since we initiated the program. A good case can be made that that condition has been met."
Lacker reiterated his long-standing opposition to what he sees as direct intervention in particular credit markets - and therefore outside the appropriate realm of central bank action.
"Compared to that benchmark policy, buying agency MBS (mortgage-backed securities) channels funds to mortgage borrowers, financed through sales of Treasury securities to the public," Lacker said.
"Aggressive use of a central bank's asset portfolio to channel credit to particular economic sectors or entities threatens dragging the central bank into distributional politics and places that governance arrangement at risk."
U.S. economic growth accelerated in the second quarter, fanning hopes the economy may be turning a corner. But Lacker argued a decline in the savings rate meant that those hoping for a further pick up in the pace of expansion might be too optimistic.
Unemployment has come down from a crisis peak of 10 percent, but remains historically elevated at 7.4 percent.
In response to the financial crisis and deep recession of 2007-2009, the Fed is on track to buy over $3 trillion in securities, having already pushed official borrowing costs down to zero.
The mere prospect of a pullback in Fed stimulus, so-called tapering, has sent Treasury yields up sharply to around two-year highs. The Fed is currently buying $85 billion in Treasury and mortgage bonds per month.
The Fed's policy-setting board next meets on September 17-18. Fed officials are still debating whether they should begin tapering by cutting purchases of Treasuries, mortgages, or both.
Fed Governor Jeremy Stein has argued mortgage purchases may be more effective, though some regional Fed hawks, like Lacker - who is not a voter this year - oppose interventions in housing on principle.
Editing by Krista Hughes