UPDATE 1-Powell: QE taper likely 'well before' interest rate increase

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WASHINGTON, April 14 (Reuters) - The Federal Reserve will reduce its monthly bond purchases before it commits to an interest rate increase, Fed Chair Jerome Powell said on Wednesday, clarifying the order of monetary policy changes that are still months if not years in the future.

The Fed is currently buying $120 billion a month in government-issued and government-backed securities, and has pledged to continue doing that until the economy is more fully recovered.

That program will start to phase out before the Fed gets to the point of raising the target interest rate from its near zero level, the second major way in which the central bank currently supports the economy.

“We will reach the time at which we will taper asset purchases when we have made substantial further progress towards our goals from last December,” Powell said in comments to the Economic Club of Washington. “That would in all likelihood be before, well before, the time we would consider raising interest rates. We have not voted on that order but that is the sense of the guidance.”

As the pace of monthly purchases is decreased and eventually reaches zero, the Fed would face a subsequent decision about whether to allow the overall size of its asset holdings to decline as the bonds in its stock of holdings matures.

As it "normalized" policy beginning in 2014, the Fed at first reinvested maturing securities to keep its overall balance sheet constant, but then allowed the balance sheet to shrink.

"These are decisions that lie ahead of us," Powell said, though he did rule out reducing the balance sheet by actively selling securities at some point. (Reporting by Howard Schneider; Editing by Chizu Nomiyama and Andrea Ricci)