(Adds more Bullard comments)
NEW YORK, Sept 26 The U.S. Federal Reserve
should decide on any future asset purchases on a
meeting-by-meeting basis as they are "a potent tool" that must
be used with care, a top Fed official said on Monday.
The Fed's balance sheet policy is the most effective tool
for conducting monetary policy in a near zero-percent interest
rate environment, St. Louis Fed President James Bullard told a
panel at a conference hosted by Medley Global Advisors and the
Last week, the Fed increased its aid to the beleaguered
economy, saying it would launch a $400 billion program to tilt
its $2.85 trillion balance sheet more heavily to longer-term
securities. The Fed said it would sell shorter-term notes and
use those funds to purchase longer-dated Treasuries.
The Fed's second round of quantitative easing, or QE2,
which ended in June "clearly drove both inflation and inflation
expectations higher and closer to the committee's implicit
target over the last year," he said.
That happened even as the U.S. economy was weaker than the
Fed had expected last fall, he said, suggesting the gap between
actual and potential growth might be smaller than previously
"You shouldn't count all the run-up in the bubble as
fundamental potential output," he said. Bullard said that
while the recovery looks weak compared with 2007, "it is not
reasonable to expect the economy to climb rapidly back to the
2007 Q4 peak since part of that peak was due to artificial
growth driven by bubble behavior."
Bullard said the Fed's other main tool -- to promise
near-zero rates for a specific time period -- has some
potential drawbacks. He said it is not clear how credible such
a promise can be and warned that pledging to policy easy for
longer and longer periods might lead to markets expecting a
mild rate of deflation.
The Fed has pledged to keep rates low for two years.
(Reporting by Kristina Cooke; Editing by Padraic Cassidy &