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Fed's George still favors an October taper

By Alister Bull

WASHINGTON, Oct 17 (Reuters) - The U.S. central bank should start scaling back its bond-purchase program this month, Kansas City Federal Reserve President Esther George said on Thursday, repeating her view that the Fed ought to begin normalizing monetary policy.

"I think to start that now would give us time to see how the economy reacts to that and not get behind in meeting our responsibilities," she told an event in Oklahoma City.

George is a voter on the Fed's policy-setting committee this year and has dissented at every meeting since January against the Fed's ultra-easy monetary policy, arguing that this could stoke future inflation and undermine financial instability.

"This is likely to be a long process - in terms of unwinding an $85 billion dollar a month pace of accommodation - before we even talk about raising interest rates," she said, underscoring her argument why the Fed cannot afford to delay any longer.

Many economists think the Fed will take no action at its meeting later this month because much of the economic data it relies upon has been delayed by a 16-day shutdown of parts of the federal government. George didn't see things that way.

"We are missing a few pieces of data that we would normally have as a result of the government shutdown. But let me assure you, we are still quite able to monitor and judge the economy's progress from other sources of information," she said.

Lawmakers voted on Wednesday to end the shutdown and raise the U.S. debt limit, averting the threat of a destructive default.

George acknowledged that growth was tepid, probably around only 2 percent in the second half of the year, but was more optimistic for 2014 and said the underlying tone was solid.

"To be sure this has been a slow recovery. But I am struck by the fact that it has been a resilient recovery...it has been resilient in the face of some very strong headwinds," she said.

One of the other challenges facing policymakers in coming months is a change in leadership after President Barack Obama nominated Fed Vice Chair Janet Yellen to replace Ben Bernanke when he steps down in January. George said this continuity should be helpful for investor confidence.

"The fact that she has been inside the Fed, I think, will be reassuring to the markets that transition should be smoother than if we brought in someone that was less well known to the Federal Reserve," she said.