The Federal Reserve should begin reducing monthly bond purchases at a meeting later this month in order to set monetary policy on a course for "gradual and predictable" normalization, a top U.S. central banker said on Friday.

Kansas City Fed President Esther George, a consistent hawk who has argued for a tapering in bond purchases all year, also said policymakers should consider enhancing communication over how quickly the Fed will start raising interest rates, currently held near zero.

"An appropriate next step toward normalizing monetary policy could be to reduce the pace of purchases from $85 billion to something around $70 billion per month," George told a luncheon of business and community leaders.

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Furthermore, remaining Fed purchases should be split evenly between Treasuries and mortgage-backed securities, she said.

"A decision to reduce the Federal Reserve's monthly asset purchases would be appropriate at that (September 17-18) meeting, as would clearer guidance about the path forward. It is time to begin a gradual — and predictable — normalization of policy."

George, a voter this year on the Fed's policy-setting committee, has dissented at every meeting since January in favor of winding back the U.S. central bank's aggressive bond purchase program. She worries that it could spur financial instability and future inflation.

Indeed, the Fed has said it expects to start scaling back bond buying later this year from a current $85 billion monthly pace.

SEPTEMBER EYED

Financial markets are focused on the policy meeting on September 17-18 for a small start to a tapering in the purchases. The Fed expects to halt these by mid-2014, when it forecasts that the U.S. jobless rate will be around 7 percent.

In fact, data released by the government earlier on Friday showed the unemployment rate creeping toward that target, with a decline to 7.3 percent in August, a 4-1/2 year low.

However, U.S. firms only added 169,000 new jobs last month, compared to a Reuters forecast for an 180,000 advance in the crucial monthly non-farm payroll report, and economists said the jobless rate drop was for the wrong reasons.

They cited a further retreat in labor participation, which has dwindled to its lowest rate since 1978 as discouraged workers gave up the search for employment.

George did not refer to the August jobs report in her prepared remarks, but acknowledged that the recovery in the labor market had been spotty and a return to full employment had been elusive.

But she said the economy had made sufficient progress in lowering unemployment to begin tapering and cautioned against allowing concern about potential financial market volatility from delaying action.

"Postponing the move to reduce asset purchases won't ease the inevitable adjustment. Taking action now, with a firm plan and clear commitment, will begin the long process of putting monetary policy to more-normal settings," she said.

Fed officials have consistently argued that tapering is not tightening policy, and that rates will remain near zero at least until unemployment hits 6.5 percent, provided the outlook for inflation remains under 2.5 percent.

But George said there was an understandable public desire to know more about the pace at which rates will rise once the Fed begins to raise borrowing costs.

"One way to clarify a path for future interest rate moves would be to include more information about future short-term interest rates in the FOMC statement," she said, referring to the Federal Open Market Committee.

One way it could do this would be to include policymakers' median forecast for rates.

"The challenges of exiting from such an extended period of near-zero interest rates are likely to require some form of guidance and could serve as a potentially important enhancement in our ongoing communication efforts," she said.

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