Fed must work to fight "disinflation": Bullard

WASHINGTON Thu Dec 2, 2010 12:35pm EST

WASHINGTON (Reuters) - St. Louis Federal Reserve President James Bullard on Thursday defended the Fed's increased purchases of U.S. Treasury debt, saying the program's benefits in fighting deflation outweigh the costs.

In a presentation to the National Economists Club, Bullard said a "clear disinflation trend" has developed during 2010. The Fed should fight this and defend its inflation target from the low side, he said, avoiding Japan's experience with these forces.

"Japanese experience indicates that a near-zero nominal interest rate, mildly deflationary equilibrium exists and is difficult to escape," Bullard said in prepared remarks. "The Japanese experience has generally been regarded as disappointing. The U.S. policy should strive to avoid this possibility."

Bullard also said that the Fed can adjust its so-called quantitative easing program as new economic data is received, in much the same way that Fed policy makers can adjust their main policy rates in response to changing conditions.

(Reporting by David Lawder; Editing by James Dalgleish)

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