Lingering uncertainty as Fed officials weigh trimming QE3

By Ann Saphir and David Bailey PORTLAND, Ore/LA CROSSE, WI (Reuters) - One top Federal Reserve official said on Wednesday he was open-minded about reducing stimulus this month, as investors largely expect the central bank to do, while another policymaker said the U.S. central bank should actually do more for the economy. The comments by San Francisco Fed President John Williams and Narayana Kocherlakota, his counterpart in Minneapolis, reflect the uncertainty that lingers over financial markets two weeks before the Fed's 19 policymakers meet to decide whether to adjust a $85-billion monthly bond-buying program. The quantitative easing program, known as QE3 because it is the Fed's third such massive effort to boost growth and employment since the Great Recession, was launched a year ago. U.S. unemployment was 7.4 percent in July, down from 8.2 percent a year earlier, suggesting to many economists that the Fed is ready to reduce the pace of buying. Still, Williams, a policy centrist speaking before a group of business and community leaders in Portland, Oregon, said he has not yet made up his mind. "I'm going into this meeting with an open mind," he said, adding that his view will depend not only on how the economic data comes in between now and then - including the August jobs report on Friday - but also on what his colleagues have to say. Broadly, Williams said "the best course forward" is a plan Fed Chairman Ben Bernanke articulated in June in which QE3 would be trimmed later this year and ended by mid-2014, as long as the economy grows as expected. The Fed has been buying Treasuries and mortgage-backed securities since last September to push down long-term borrowing costs, and has promised to continue the program until there is substantial improvement in the labor market outlook. The central bank has also said it will keep interest rates near zero until the unemployment rate falls at least to a threshold of 6.5 percent, as long as inflation expectations remain below 2.5 percent. Kocherlakota, repeating a long-held stance, said the Fed's own forecasts suggest it "should be providing more stimulus to the economy, not less." An outspoken dove, Kocherlakota noted that the Fed's policy-setting Federal Open Market Committee (FOMC) expects inflation to remain at or below 2 percent over the next few years, and that unemployment will decline only gradually. "These forecasts imply that the Committee is failing to provide sufficient stimulus to the economy," he told an audience at the University of Wisconsin. Kocherlakota did not repeat - as he has in many previous speeches in arguing for easier policies - that the Fed should keep rates low until unemployment falls to 5.5 percent, and not the current threshold of 6.5 percent. Though he gave no hint he had backed down from that stance. Turning to his own economic forecasts, Kocherlakota said he was hopeful U.S. joblessness would fall to between 5.2 and 6.0 percent, with inflation around 2 percent, before five years from now. By that time, he said, more Americans should have jobs than now, but probably not as many as in the boom year 2007 because the overall population is aging. Under the Fed's rotating system, neither of the men have votes on policy this year. But Kocherlakota has a say next year and Williams regains a vote in 2015. Meantime in Washington, the Fed said the U.S. economy expanded at a "modest to moderate" pace in most of the country between early July and late August. The Beige Book report, which is compiled from conversations with Fed business contacts and was published on Wednesday, was just strong enough to reinforce the prospect of a pullback in monetary stimulus. (Writing by Jonathan Spicer; Additional reporting by Pedro Nicolaci da Costa in Washington; Editing by Diane Craft)