(Recasts, adds comments from Q&A)
By Kristina Cooke and Emily Flitter
NEW YORK, April 15 The Federal Reserve's pledge to keep interest rates low for an extended period should reflect more "conditionality" on the state of the economy, a top official of the U.S. central bank said on Thursday.
James Bullard, president of the St. Louis Fed, said the pledge should not be linked to a specific time-frame.
"Everything depends on economic performance and we'd like to be able to convey that," Bullard told reporters after a speech to a Levy Economics Institute.
He characterized the U.S. economic recovery as "not super strong" but "very reasonable."
The Fed cut its benchmark federal funds rate to near zero percent in December 2008 and has continued to hold it there to support the U.S. economic recovery. It also bought longer-term assets including $1.25 trillion in mortgage-backed securities to keep down borrowing costs.
The minutes of the Fed's last meeting, Bullard said, conveyed the "flavor" of the policy-setting committee's thinking. If the economy performed better the Fed could tighten sooner, "but if it doesn't come in so strong or inflation remains subdued then it could be a lot longer before we tighten," he said.
Bullard, a voter on the Fed's policy-setting Federal Open Market Committee this year, said asset sales would be one way to tighten policy, but the Fed would have to be cautious.
REFORM PROPOSALS FALL SHORT
Bullard was sharply critical of Congressional proposals to overhaul U.S. financial regulation, saying that only a few of the current proposals are likely to help prevent future crises.
The U.S. Senate is moving close to voting on proposed financial regulatory reform legislation. The House of Representatives passed its own bill late last year.
Both proposals create mechanisms designed to spot and head off potential financial crises by establishing regulatory councils, but Bullard said the Federal Reserve's political independence may make it better suited than a council of regulators to spot and act upon behavior that could threaten the entire financial system.
The Senate bill would set up a nine-member council of regulators, chaired by the Treasury secretary. The House bill would establish an inter-agency council chaired by the Treasury as well, but gives the Fed a bigger role as chief policy agent.
"It seems like it would be difficult for an inter-agency council to come to agreement on specific risk and an associated action when times are good," Bullard said. "This type of decision may be better suited to the Fed."
He said it was unclear if a systemic risk council would be able to prevent a future crisis.
Bullard argued for a broader regulatory role for the U.S. central bank, and said reform proposals that would strip the Fed of supervision of smaller banks and create a "Wall Street only" Fed are worrying.
"A Fed with an appropriately broad regulatory responsibility provides the U.S. with the best chance to head off a future crisis," he said. Many of the problems that led to the current crisis occurred outside the Fed's purview, complicating the U.S. central bank's role as lender of last resort, he added.
"A lot of the talk about regulatory reform is too bank centric," Bullard said, warning that the reform proposals would leave the United States vulnerable to runs in the shadow banking system.
And while he agreed that a resolution regime for failing financial institutions would prevent firms from taking excessive risks, Bullard said "funeral plans" for firms did not strike him as credible.
He also called the absence of discussion of Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies that operate under congressional charters, in the reform bills "an outrage".