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NEW YORK, May 29 (Reuters) - Former Federal Reserve Chairman Paul Volcker on Wednesday waded into the debate over when to reduce today's ultra-easy U.S. monetary policies, arguing that the benefits of bond-buying are "limited and diminishing" and warning that central banks are too often late in removing stimulus.
Volcker, who led the U.S. central bank's aggressive battle against inflation in the 1970s, said the decision to adjust policy will come down to good judgment, leadership, and "institutional backbone" in the face of political pressure.
"Here and elsewhere, the temptation has been strong to wait and see before acting to remove stimulus and then moving toward restraint," Volcker, 85, told the Economic Club of New York.
"Too often the result is to be too late, to fail to appreciate growing imbalances and inflationary pressures before they are well engrained," he said.
The Fed under Chairman Ben Bernanke is buying $85 billion in assets each month until the labor market improves, and has promised to keep rates near zero until the unemployment rate falls to 6.5 percent or so, from last month's lofty 7.5 percent.
With inflation lower than target and the jobless rate having slowly fallen since the third round of quantitative easing (QE3) was launched in September, 2012, investors are now anxiously predicting when the Fed will reduce the pace of purchases.
The central bank is effectively "acting as the world's largest financial intermediator," Volcker said, adding the QE3 program is like "pushing on a string."
"The risks of encouraging speculative distortions and the inflationary potential of the current approach plainly deserve attention," he said after the Economic Club presented him a leadership award.
Last week, Bernanke said he was a "a bit" more concerned about financial stability, including asset-price bubbles caused by the easy money. But the current chairman stressed that more economic progress was needed before policy stimulus could be removed.
Volcker added he does not doubt the "ability and understanding" of Bernanke and other top Fed officials.
His wide-ranging and at times light-hearted speech also bemoaned a lack of progress on financial regulation, including his namesake Volcker Rule that would stamp out risky proprietary trading at banks.