Bullard says low inflation gives Fed room to keep easing

ST. LOUIS Wed Apr 3, 2013 5:12pm EDT

President and CEO of the Federal Reserve Bank of St. Louis James Bullard poses during an interview at the Federal Reserve Bank of St. Louis June 8, 2011. REUTERS/Peter Newcomb

President and CEO of the Federal Reserve Bank of St. Louis James Bullard poses during an interview at the Federal Reserve Bank of St. Louis June 8, 2011.

Credit: Reuters/Peter Newcomb

ST. LOUIS (Reuters) - The Federal Reserve has room to keep buying bonds to support the U.S. economic recovery because inflation remains low, St. Louis Fed President James Bullard said on Wednesday.

Bullard told reporters in a news conference he still expects the economy to expand 3 percent this year, a forecast that puts him in the more bullish camp of central bankers.

Yet with inflation running well below the Fed's 2 percent target, Bullard said policymakers can take their time before deciding whether to halt or reduce the Fed's monthly purchases of $85 billion in mortgage-backed and Treasury bonds.

"We don't need to be in any hurry," said Bullard. "We can take our time to make sure the data comes in as strong as we think it will."

Since the Fed first brought interest rates to near zero in late 2008 and then embarked on unconventional monetary easing through bond-buying, Bullard has been an advocate for altering the pace of asset purchases continually in response to incoming economic data.

While the Fed has been focused on the prospect that it might be able to begin tapering purchases towards the end of this year, Bullard did not rule out the possibility that officials would choose to boost the stimulus instead if the economy deteriorates.

"If inflation drifted down in conjunction with renewed economic weakness, the committee might contemplate (an increase)," he said.

The Fed has vowed to continue buying assets until it sees substantial improvement in the labor market.

The economic expansion that followed the deepest recession in generations has been unusually weak, leaving unemployment at historically elevated levels. In February, the jobless rate stood at 7.7 percent, far from the threshold of 6.5 percent that the Fed has set for consideration of eventual rate hikes.

U.S. gross domestic product grew at just a 0.4 percent annual rate in the final three months of 2012 but is expected to have rebounded to around 3 percent in 2013's first quarter.

He acknowledged that the Fed's unorthodox approach carries risks, including possible disturbances to financial stability. But he added there is no evidence currently of "frothy" behavior in financial markets that would lead him to seek a shift in monetary policy.

Separately, Bullard said he remains concerned about the problem of banks that are considered too big to fail and said he supports breaking up the country's largest financial institutions.

"We have not ended the too-big-to-fail problem in the U.S.," Bullard said.

(Reporting By Pedro Nicolaci da Costa; Editing by Chizu Nomiyama and Kenneth Barry)

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