UPDATE 2-Fed's Bullard could back easing in $100 bln steps

Thu Oct 21, 2010 6:21pm EDT

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(Recasts, adds details and background) *Fed's Bullard-would favor $100 bln easing increments *Bullard - economy little changed since summer *Fed could signal at each meeting if easing more

By Mark Felsenthal

ST. LOUIS Oct 21 (Reuters) - St. Louis Federal Reserve President James Bullard said on Thursday he would favor Fed purchases of Treasury securities in $100 billion increments one Fed meeting at a time if the U.S. central bank decides monetary easing is necessary.

"If we do decide to go ahead with quantitative easing ... we could think in units of about $100 billion," he said.

"And then I think we could give forward guidance for the next meeting that would suggest how likely the committee thinks it is to continue these purchases," he added.

Bullard's comments add to those of other Fed officials whose remarks suggest the U.S. central bank is on the cusp of pumping more money into the economy to support a flagging recovery.

The Fed cut interest rates to near zero and bought $1.7 trillion of longer-term securities to pull the economy out of recession, but with an anemic recovery and persistently high unemployment, policymakers are expected to step in with another round of stimulus.

Analysts anticipate around $500 billion in fresh Treasury buying to be announced at the Fed's Nov. 2-3 meeting, and some see a shopping spree of $1 trillion or more.

Fed Chairman Ben Bernanke said last week that a prolonged period of high unemployment could choke off the U.S. recovery and that the low level of inflation presented an uncomfortable risk of deflation, a dangerous downward slide in prices. Such circumstances would seem to meet the threshold for further Fed action, he said.

On Tuesday, Atlanta Fed President Dennis Lockhart said any additional Fed securities purchases would have to be large enough to have an impact and that increments of about $100 billion would be roughly on target.

FAVORS NO CEILING

Bullard, a voter on the Fed's policy-setting panel this year, said the decision on further easing is "a tough call," but acknowledged that sluggish economic growth and a grim jobs market are little improved in recent months.

"We've only got this weak data, weak job growth, and so we're not that different from the position we were in during the summer," he said.

Bullard further said he does not think the Fed should set a ceiling on how much further easing it is willing to provide.

"You just leave it open-ended," he said. "People would impute what they think the Fed's going to do based on their own forecasts... We would do the best we can to communicate how we think the program is evolving."

The Fed has considered measures beyond securities purchases to bolster the recovery, including setting goals for higher inflation than it prefers on a temporary basis.

But Bullard, who is at the center of a continuum among policymakers between those who would contain inflation at all costs and those who emphasize full employment, said the time is not ripe for such an approach, known as price-level targeting.

"It would be too large of a step at this juncture ... but I would retain an open mind as a step we could take in the future if we felt our existing policies weren't producing satisfactory results," he said. (Reporting by Mark Felsenthal; Editing by James Dalgleish)

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