MONTREAL (Reuters) - Low U.S. inflation means the Federal Reserve can stick to an aggressive bond-buying campaign if it decides that is warranted, a senior central banker said on Monday, arguing he did not favor tapering bond purchases while price pressures were falling.
St. Louis Fed President James Bullard acknowledged that U.S. unemployment had fallen since the Fed began buying $85 billion worth of Treasury and mortgage backed bonds a month. But his remarks put more weight on low inflation.
"Labor market conditions have improved since last summer, suggesting the Committee could slow the pace of purchases, but surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame," he told an economic conference in Montreal, referring to the U.S. central bank's policy-setting Federal Open Market Committee.
"Maybe this is noise in the data, maybe this will turn around, but I'd like to see some reassurance that this is going to turn around before we start to taper our asset purchase program," he said.
The Fed's preferred gauge of price pressures, the PCE price index, was up 0.7 percent in April compared to a year ago, slowing from a 1.0 percent gain in March.
Bullard is a voting member of the Fed's policy-setting committee this year.
Financial markets were rocked by talk of an imminent tapering in asset purchases, currently $85 billion a month, after comments by Fed Chairman Ben Bernanke on May 22 that the Fed could scale back buying at the next few meetings.
U.S. jobs data for May came in around expectations, showing 175,000 nonfarm payroll positions were added last month. But other economic data has been mixed and the Fed is not widely expected to announce any such move at its next meeting, on June 18-19.
Bullard's comments reiterate an argument that he has made several times recently after data showed U.S. inflation remained well under the Fed's 2 percent target.
He said the asset purchase program ought to turn that around - as was the case during the Fed's second round of quantitative easing, dubbed QE2 - and the failure so far for prices to push back up toward target was a cause for concern.
"So far that hasn't happened, so I'm still waiting for that to happen and I'm getting a little bit nervous," he said during an audience question-and-answer session after his presentation.
Bullard acknowledged that U.S. unemployment had declined since last summer, the period when the Fed was reviewing data that led it to announce a third round of bond buying in September. but on balance he appeared more worried by prices.
"Inflation in the U.S. has surprised to the downside," Bullard said during his presentation. "This configuration of data suggests that the Federal Open Market Committee can continue to pursue its aggressive asset purchase program."
The Fed is also expected to recommit at the meeting next week to keeping interest rates near zero until unemployment has fallen to 6.5 percent, so long as inflation stays under 2.5 percent. The U.S. unemployment rate in May was 7.6 percent.
Fed officials are divided over their ultra-easy monetary policy and some warn it could stoke future inflation and financial instability.
Bullard said excessive risk-taking, which sparked a severe U.S. recession between 2007 and 2009 that sent unemployment soaring, was a serious concern. But he played down the evidence that it was again taking hold in U.S. financial markets.
"So far, it appears that this type of activity has been limited since the end of the recession in 2009," he said. "Still, this issue bears careful watching: Both the 1990s and the 2000s were characterized by very large asset bubbles."