Fed's Bullard: Large balance sheet a concern

WASHINGTON, July 29 (Reuters) - The Federal Reserve's much expanded balance sheet could pose an inflation risk if policymakers fail to shrink it at the right time, a senior Fed official said on Friday.

St. Louis Fed President James Bullard said that because inflation has climbed recently, the Fed's easy money policies have been even looser.

"Given the near-zero policy rate, this means real short-term rates have declined," Bullard said in remarks prepared for delivery to a conference in Jackson, Wyoming.

The Fed's balance sheet has ballooned to near $2.85 trillion from a pre-crisis level of around $900 billion as the central bank has bought securities to stimulate economic growth.

Bullard said monetary policy is appropriate at current levels. However, if the economy strengthens as he expects in the second half of the year, the Fed will need to be ready to time policy tightening correctly.

Touching on the political stalemate in Washington over giving the government more authority to borrow, Bullard said the Fed could not be called in for a last minute rescue.

"The notion sometimes floated in financial markets that the Fed can simply step in if necessary is incorrect," he said. (Reporting by Mark Felsenthal; Editing by Leslie Adler)