By Jonathan Spicer
NEW YORK, Feb 21 (Reuters) - The Federal Reserve could reduce its asset purchases on par with the level of improvement in the troubled U.S. labor markets, a top Fed official said on Thursday, offering another take on a question that has financial markets on edge.
St. Louis Fed President James Bullard, a voting member of the Fed's monetary policy committee this year, said the currently low inflation readings may give the Fed some leeway to continue its quantitative easing program longer than it would otherwise.
The U.S. central bank is buying $85 billion in bonds per month to lower longer term borrowing costs, encourage investment and spending, and boost the stop-start U.S. economic recovery. It has repeated it will buy the bonds until the labor market outlook improves substantially.
But "substantial labor market improvement" does not arrive suddenly, Bullard said in a lecture at New York University. "This suggests that as labor markets improve somewhat, the pace of asset purchases could be reduced somewhat, but not ended altogether."
Markets are abuzz with speculation that the Fed could taper or halt the bond buying, known as QE3, earlier than expected.
That buzz amplified on Wednesday when minutes from the central bank's January policy meeting showed a number of Fed officials think QE3 might have to slow or stop before the desired pickup in hiring is achieved, because of the costs and risks that the program might bring.
Bullard acknowledged that the size of the Fed's balance sheet, now at more than $3 trillion, may complicate or prevent a "graceful" exit from the very accommodative policies it has adopted to boost the U.S. recovery from the worst recession in decades.
As it stands, the Fed is buying $45 billion in Treasuries and $40 billion in mortgage-backed securities (MBS) per month in its third round of quantitative easing. It has also pledged to keep interest rates near zero until the unemployment rate drops to 6.5 percent, from 7.9 percent now, as long as inflation expectations remain contained.
Earlier on Thursday, government data showed that consumer prices were flat. That could give a boost to those at the Fed pushing to continue aggressively buying bonds.