WASHINGTON Federal Reserve policy makers all agree they would provide more support to the economy if the recovery suffers a serious setback, St. Louis Federal Reserve Bank President James Bullard said on Friday.
"I think everyone on the committee is completely on board with the idea that, you know, if things got really bad, we would try to take other action," he said on CNBC television.
Bullard said he has concerns that the Fed's current policy of promising exceptionally low interest rates for an extended period could have the opposite of its intended effect of stimulating growth.
The Fed's policy setting Federal Open Market Committee promised ultra low rates for a long time to underscore its intention to support the economy as it was battered by a deep financial crisis and painful recession.
But Bullard, repeating comments he made on Thursday, said his research shows the pledge could in fact cause the economy to stall at a point of falling inflation and sluggish growth, mirroring Japan's. Japan for years has struggled to escape from weak or little growth and deflation.
The St. Louis Fed president's concerns with deflation illustrate the quandary facing the Fed, which has watched the recovery fade despite taking some of the most aggressive actions in central banking history. U.S. economic growth slowed to a 2.4 percent annual rate in the second quarter of 2010 from a revised 3.7 percent growth rate in the first quarter, the government said on Friday.
Concerns about the stumbling recovery have shifted the debate at the Fed from a discussion about how and how soon to pull back its extensive support for the economy to whether the central bank should be more aggressive in protecting the flagging recovery.
Bullard said with interest rates near zero, the central bank should shift its focus from promising low interest rates to using its printing press to push more credit into the financial system as economic conditions fluctuate.
"At every meeting you should be saying, OK, here's how the data came in, here's how the forecast changed, so we're going to adjust a little in this direction, here's how we're going to react to events," he said.
However, some at the central bank remain concerned the Fed's super-easy money policies are a recipe for inflation down the road. Bullard said the Fed must also be on guard against such risks.
"There's two sides to this," he said. "On the short term you do have pretty low inflation, and trending down, and you do have some risk there. In the medium term, you've got a huge balance sheet that could turn into really a lot of inflation."
The Fed's next policy-setting meeting is August 10.
(Reporting by Mark Felsenthal; Editing by Neil Stempleman)