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ST. LOUIS (Reuters) - Greece could exit the euro zone without doing deep damage to the U.S. and European economies if the transition is handled properly, a top U.S. Federal Reserve official said on Wednesday.
Concerns about a Greek exit have kept global financial markets under pressure in recent days.
"I'm one that thinks that Greece could exit, and it could be handled in an appropriate way without causing too much damage, either in Europe or in the U.S.," St. Louis Federal Reserve Bank President James Bullard told Reuters.
Bullard's remarks came as senior European officials advised leaders to prepare contingency plans in case Greece quits the single currency area. European Union leaders are meeting to discuss a way to breathe life into their struggling economies.
Concerns have escalated that Greek voters could open the departure door if they vote for anti-bailout parties at a June 17 election. There are fears that Spain, where the economy is in recession and the banking system in disarray, could be the next country subject to damaging financial market pressure.
Bullard said he believes the European Central Bank is committed to backing the continent's brittle banking system, and therefore the risks to the U.S. economy are smaller than some analysts perceive.
Indeed, Bullard added he expects the U.S. economy to perform better than many forecasters anticipate and that the Fed will therefore need to raise interest rates in late 2013, not late 2014 as its policy committee is currently indicating.
Bullard has been viewed as a centrist on the spectrum of Fed officials, near the mid-point of so-called "doves" who favor aggressive measures to boost growth and "hawks" who would place highest priority on avoiding inflation at all costs. However, he has recently sounded like a hawk, recommending against further bond buying to bring down the lofty 8.1 percent unemployment rate and raising concerns that a long-period of ultra-low rates has hurt savers.
In a similar vein, Bullard said paring the Fed's mandate from its current dual focus on full employment and stable prices to a single-minded focus on inflation-fighting - as some Republican lawmakers have proposed - would dispel any misconceptions about how much power the Fed has to boost hiring.
"The dual mandate is fine if it's correctly interpreted," he said. "But now it's become subject to differing interpretations."
Programs that have direct impact on labor markets, not monetary policy, should be the focus of putting people back to work, Bullard said.
"Any time you have high unemployment, there's going to be pressure on the Fed," he said. "You don't want to give the impression that the Fed can really do something directly about labor markets."
He acknowledged that recent U.S. economic data have been "a bit mixed." But he said he does not think he will change his forecast of U.S. growth of 3 percent for the year at the Fed's June meeting.
"All the headlines right now are about the risks, mostly coming from Europe," he said. "But if you actually look at the U.S. data, it's pretty solid and I still expect the economy to improve in the second half of the year."
Bullard is not currently a member of the Fed's rate-setting policy committee but will be next year.
He said the Fed does have additional ammunition if needed - for instance, in case the U.S. economy stumbles.
"If there was a sharp slowdown in the U.S. I do think we'd have further scope to take action, we'd be taking on more risk, but we could do it if the situation called for it," he said.
Bullard said he does not foresee any market turmoil with the late-June expiration of the central bank's latest effort to keep long-term borrowing costs down.
In response to a historic financial crisis and deep recession, the Fed cut benchmark interest rates to effectively zero and bought some $2.3 trillion in Treasury and mortgage securities.
Bullard said the Fed is considering additional ways to become more transparent in communicating its policy intentions, including producing quarterly reports on monetary policy rather than the current biannual report to Congress. Still, he said any new steps would take time, and should not be expected at the Fed's June meeting.
Long considered secretive and opaque, the Fed has stepped up efforts to open its deliberations and thoughts about monetary policy to the public. Fed Chairman Ben Bernanke started giving quarterly news conferences in 2011; the central bank now details when individual policymakers think interest rates will rise for the first time and where benchmark rates will be in coming years.
However, transparency efforts are a work in progress, Bullard said.
Some market observers have been confused by apparent discrepancies between the Fed's policy statement, which says conditions are such that the first rate hike won't happen until 2014, and its economic projections, which seem to show officials gravitating toward raising rates earlier.
Fed officials are dissatisfied with the way the economic projections are presented, Bullard said. With the views of the 17 members of the policymaking body represented -- soon to be 19 when two new members take their seats, there is potential for confusion, he said.
"You've got these pictures with dots on them -- what does it mean?" he said. "It's a sketchy description of the economy. You've just got a couple of variables -- we could do better than that."
Writing by Tim Ahmann and Pedro da Costa; Editing by Chizu Nomiyama, Padraic Cassidy, Andrew Hay, Diane Craft and Lisa Shumaker