March 27, 2014 / 3:05 AM / 3 years ago

UPDATE 3-Fed's Bullard sees potential risk of bubble as easy policy unwound

* Bullard says risk rates could be kept too low for too long

* Says see U.S. rates at normal levels in 2016

* Says China property markets at concerning levels (Updates to add links to Reuters Television interview and graphics)

By Michael Flaherty and Saikat Chatterjee

HONG KONG, March 27 (Reuters) - A bubble could form in the U.S. economy even as the Federal Reserve unwinds its accommodative policy, a top U.S. central banker said on Thursday, adding policymakers’ ability to spot them had improved substantially.

James Bullard, president of the Federal Reserve Bank of St. Louis, also told an investment conference in Hong Kong that while there was a risk of keeping rates too low for too long, he did not think the Fed was doing that.

“I don’t see an immediate bubble now, but maybe one would form as we are trying to remove policy accommodation in the years ahead, because that’s what happened in the 2004-2006 period,” Bullard said.

He told the Credit Suisse investor conference he did not see anything in the magnitude of the previous tech or housing bubbles, and he repeated his view that bubbles can form even when monetary policy is being tightened.

The Fed has held rates near zero since late 2008 to help battle a brutal recession. It also launched massive bond-buying stimulus, which it is now tapering and which is widely expected to end late this year.

Last week, the Fed said it expected to keep interest rates near zero for a “considerable time” after the bond-buying program ends -- a period Fed Chair Janet Yellen subsequently said was probably around six months.

Markets took that as a signal U.S. rates could start to rise in about a year’s time, sooner than previously anticipated.

UNCONVENTIONAL BUT EFFECTIVE

Bullard said the Fed’s unconventional policies were effective, even as he nodded to the possibility they may be suboptimal and therefore contributing to unnecessary global volatility.

He told Reuters Television the U.S. central bank would only consider hiking rates when inflation rises.

“Inflation is very low in the U.S. I‘m projecting that it will move back to target in 2014, but so far that hasn’t happened,” he said.

For 2016, Bullard reiterated that he saw interest rates at “normal levels”, which for him is 4 percent or 4.25 percent.

In response to a question at the conference, Bullard said he did not favour raising the inflation target in the United States to 4 percent from 2 percent.

“I don’t think it is a good idea,” he said. “Most of the models say ‘just name an inflation target and proceed from there’, but I don’t see it as a good idea.”

CHINA PROPERTY

In the interview with Reuters Television, Bullard said property markets in China have reached “concerning” levels.

“That seems unhealthy to me and it needs to be unwound. Chinese authorities are very aware of this, but it’s always worrying how it’s going to play out in the way ahead.”

China’s red-hot property market has shown signs of losing steam since late 2013.

In big cities, demand remains robust and the chances of a slump in prices are slim, according to a Reuters poll. But prices are falling in some smaller centres, causing jitters among investors since the property sector drives a significant portion of the world’s second-biggest economy. (Additional reporting by James Pomfret; Editing by John Mair)

Our Standards:The Thomson Reuters Trust Principles.
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