WASHINGTON (Reuters) - St. Louis Federal Reserve Bank President James Bullard on Friday issued a sharp rebuke of his colleagues' decision this week to announce a plan to reduce the central bank's bond buying, calling the move premature and worrying the Fed is risking its credibility as a force for price stability.
Neither the central bank's own economic growth forecasts nor its expectations for continued weak inflation supported a decision to dial back soon on the $85 billion a month it has been pumping into the financial system, the St. Louis Fed said in explaining Bullard's thinking.
"President Bullard ... felt that the committee's decision to authorize the chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed," the regional Fed bank said in a statement.
Global financial markets have sunk sharply since Wednesday when Federal Reserve Chairman Ben Bernanke laid out the central bank's strategy for cutting the pace of asset purchases later this year, provided the economy continues to improve as the Fed expects.
Bullard's vote against the majority, his first-ever dissent, was one of two cast by members of the U.S. central bank's policy-setting Federal Open Market Committee. The other dissent, by Kansas City Fed President Esther George who has cast a no vote at each meeting this year, was in the opposite direction, as she worried that bond buying could stoke financial instability.
Bernanke's detailed outline of the strategy for closing out the central bank's bond-buying program, which came in a news conference following the policy statement, surprised markets. It was unusual for the committee to deputize the chairman to offer policy guidance during the news conference that went well beyond the panel's written statement.
The central bank, which has held overnight interest rates near zero since 2008, is buying bonds at an $85 billion monthly pace to put downward pressure on longer-term borrowing costs. These steps are designed to boost U.S. growth and hiring.
Bullard's statement, which was issued after the expiration of a blackout on Fed officials' comments around the meeting, was not unprecedented. Richmond Fed chief Jeffrey Lacker also released explanations of his dissents when he was a voter in 2012. Lacker dissented at every meeting that year.
Highlighting an apparent contradiction, the St. Louis Fed noted that the 19 Fed officials who took part in the policy discussion on Wednesday released economic projections in which they marked down forecasts for U.S. growth and inflation in 2013, while "simultaneously announcing that less accommodative policy may be in store."
"President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement," it said.
In a detailed explanation, it also repeated that Bullard thought the Fed should have more strongly signaled a willingness to defend its 2 percent inflation target, in light of recent low inflation readings, which was the explanation for his dissent offered in a statement issued by the Fed on Wednesday.
Bullard worries the Fed risks losing its credibility as the chief agent for price stability if it does not take measures to drive prices upward when inflation is below its target, as well as downward when they are above it.
The so-called PCE price index, the Fed's favored inflation gauge, was up just 0.7 percent in the 12 months through April. The core index, which strips out food and energy costs to provide a better sense of inflation trends, was up just a bit more than 1 percent, a record low increase.
The FOMC estimated the PCE price index would rise between 0.8 percent and 1.2 percent this year, on average. That marked a sharp cut from March when it forecast a range of 1.3 percent to 1.7 percent.
Its 2013 GDP growth forecast came in at 2.3 percent to 2.6 percent, just a bit softer from the 2.3 percent to 2.8 percent projection policymakers had made in March.
Furthermore, the St. Louis Fed said that Bullard viewed the decision to lay out a rough timeline for scaling back bond buying, which Bernanke explained would likely come to a halt around mid-2014, was a step away from a policy that was dictated solely by economic conditions, rather than calendar dates.
Reporting by Tim Ahmann and Alister Bull; Editing by Lisa Von Ahn and Chizu Nomiyama