Fed's Bullard sees risks with "extended period" phrase

FRANKFURT Sat Mar 26, 2011 4:26am EDT

FRANKFURT (Reuters) - Lengthening the "extended period" of low U.S. interest rates could encourage a liquidity trap, a top Federal Reserve official said on Saturday.

St. Louis Federal Reserve President James Bullard was commenting on the Fed's promise to keep interest rates low for an "extended period" to blunt the effect of recession.

"The conventional wisdom policy response to a negative shock is to promise a longer 'extended period'," St. Louis Federal Reserve President James Bullard said, according to slides he was due to present in Marseille, France on Saturday.

"This may work -- but it may also encourage a liquidity trap outcome," he added in the slides, part of a presentation entitled 'Reducing Deflationary Risk in the U.S.'.

"A better policy response to a negative shock is to expand the QE program," he added, referring to the quantitative easing, which he said have been successful in the United States and Britain.

Bullard, who is a not a voting member on the Fed's policy setting panel this year, is viewed as a centrist on the spectrum of supporters or opponents of aggressive Fed actions to boost the economy.

The global economic recovery is continuing, Bullard said, adding: "During the recovery process, economies are susceptible to further negative shocks."

(Writing by Paul Carrel)

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