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ROGERS, Arkansas (Reuters) - Accommodative bond-buying must continue for now despite possible inflation risks in part because there are no signs of price rises so far, St. Louis Federal Reserve President James Bullard said on Thursday.
Bullard, a voter on monetary policy this year, added he expects the U.S. central bank's balance sheet to "eventually" return to a pre-financial-crisis level of around $800 billion, though "it may take quite a while."
Bond-buying in the wake of the 2007-2009 recession has swelled the Fed's balance sheet to about $3.9 trillion. While it is meant to spur investment, hiring and economic growth, there are concerns that all the money-printing is laying grounds for a run-up in inflation.
Still, inflation remains just over 1 percent, lower than the Fed's 2-percent goal, and unemployment remains worryingly high at 7.3 percent last month.
"What we need to do is continue with the program for now as we have, but if an inflation problem starts to develop we have to be willing to move to arrest that problem," he told a University of Arkansas event. "At that point I'd put on my inflation hawk hat and spring into action."
He added: "We do want to get back to a normal-sized balance sheet," he said, adding the portfolio should consist of only U.S. Treasury bonds.
The Fed is now buying $85 billion in Treasuries and mortgage bonds each month, though minutes from the last policy meeting suggest officials are preparing to reduce that pace in coming months as long as the economy continues to improve.
The Fed has said it will keep buying bonds until labor-market improvement is sustainable. It has further said it will keep rates ultra-low at least until unemployment falls to 6.5 percent, as long as inflation is contained.
The Fed in 2011 published a so-called exit strategy for returning its balance sheet to a more normal level in the years ahead, and it formally reviewed that strategy in 2013.
According to the 2011 plan the Fed would halt reinvestment of principal; then modify forward guidance on interest rates; then raise policy target using the rate paid on excess bank reserves; then possibly sell agency-backed securities.
On Thursday, Bullard said he and fellow policymakers have talked about the strategy on occasion but have not felt the need to revise it. "It would basically be the same as what we espoused earlier," he said.
Emphasizing a theme the Fed has stressed as it looks to reduce the bond-buying, Bullard said interest rates will very likely stay near zero "for a while longer."
Having kept benchmark U.S. interest rates near zero for nearly five years, the Fed must now rely on bond-buying and communication about future policy intentions, he added with a tone of regret over how quickly the Fed sent rates to rock bottom.
"I think the December 2008 (Fed) decision unwittingly committed the U.S. to an extremely long period at the zero lower bound similar to the situation in Japan, with unknown consequences for the macroeconomy," he said, pointing to the Bank of Japan's long struggle against deflation and slow growth.
Additional reporting by Ann Saphir and Alister Bull; Editing by Andrea Ricci and James Dalgleish