NEW YORK Low readings on inflation allow the U.S. Federal Reserve to be patient in deciding when to scale back its pace of asset purchases, a senior Fed official said on Friday, cautioning that he would not back action until price pressures picked up.
"While I expect inflation to rise during the coming quarters, I want to see evidence of such an increase before endorsing less accommodative policy action by the FOMC," James Bullard, president of the St. Louis Federal Reserve, said.
Bullard said earlier on Friday in an interview with Bloomberg television that the Fed's policy-setting Federal Open Market Committee could still scale back its massive bond-buying campaign at its next meeting, in late October, if the data was strong enough.
The FOMC on Wednesday voted to continue to buy bonds at a monthly pace of $85 billion.
Bullard said the prospects for tapering would harden if U.S. payroll and unemployment data showed further recovery.
"To the extent that these two important labor market indicators continue to show improvement, the likelihood of tapering policy action will continue to rise," Bullard said in remarks to the New York Association for Business Economics.
Bullard, a committee voter this year, supported the decision on Wednesday not to alter the current pace of bond purchases.
The move stunned financial markets, which had expected a modest adjustment that would have signaled the beginning of the end to a phase of ultra-easy U.S. monetary policy that has already lasted five years.
Defending their action, Bullard noted that policymakers were forced to curb 2013 and 2014 growth forecasts, as well as expectations for inflation, which has challenged the confidence they felt in June that the second half would be stronger.
"Normally, the committee would not want to reduce policy accommodation in this situation," he said.
He rejected the notion that the Fed, by disappointing markets, had compromised its policy credibility.
"I think it enhanced our credibility in the sense that it showed we really are paying attention to data and not on some automated program to cut QE to zero," he told reporters following his speech.
Kansas City Fed President Esther George, who was the lone dissenter against the decision, said on Friday the Fed had damaged its credibility by deciding not to act.
Bullard stressed that all Fed officials pay careful attention to asset prices, but said he did not see any sign of a bubble akin to those of recent years in housing and in technology stocks.
"The bubbles we had in the past were gigantic and obvious. I don't see anything like that going on right now," he said.
JUST LIKE CONVENTIONAL POLICY
The sharp market reactions in both June and September as investors recalibrated expectations for future Fed bond buying also showed that this unconventional tool was just as powerful as changes in Fed interest rates.
"The empirical evidence from these two episodes provides striking confirmation that changes in the expected pace of purchases act just like conventional monetary policy," Bullard said.
Bullard is usually seen as a policy centrist, but has become one of the central bank's most vocal doves due to concern that inflation remains too far beneath the Fed's goal of 2 percent, which he worries could lead to damaging deflation.
"The main macroeconomic surprise in the U.S. since September 2012 has been a lower rate of inflation," said Bullard, who dissented in June because he wanted a firmer commitment from the Fed to defend against price pressures slackening too far.
A recent Reuters poll of dealers found most now expect the Fed to begin scaling back bond purchases in December, though Bullard said that outlook is likely because Chairman Ben Bernanke has scheduled a news conference after the December meeting.
But Bullard said the Fed could call a news conference in October if it deemed it necessary.
Eventually, he said, the Fed's policy-setting committee would probably have to hold a press conference after every meeting.
"The ECB has long done this, and I think it provides the chairman an opportunity to communicate with markets on a regular basis," he said. "Even if he has nothing to say, that's very reassuring.
(Reporting by Steven C. Johnson; writing by Alister Bull; Editing by Leslie Adler)