* Bullard says buy more Treasuries if prices dip
* Extended period vow may abet inflation drop-Bullard
* Fisher says more accommodation wouldn't help
By Mark Felsenthal
WASHINGTON, July 29 U.S. Federal Reserve
officials clashed on Thursday over whether the central bank
should be more aggressive in supporting the stumbling economy
and one said the Fed's current policy may be contributing to
worryingly low levels of inflation.
The Fed's promise to hold benchmark interest rates
exceptionally low for an extended period -- a vow aimed at
giving extra punch to rock-bottom borrowing costs -- "may be
increasing the probability of a Japanese-style outcome for the
U.S.," St. Louis Federal Reserve Bank President James Bullard
said. Japan has struggled to break out of deflation and weak or
no growth for years.
Bullard, a voter on the Fed's policy-setting panel this
year, said the central bank should be ready to shift its focus
to more aggressively pumping credit into the financial system
to get the economy going if the recovery appears at risk.
"On balance, the U.S. quantitative easing program offers
the best tool to avoid such an outcome," he said, adding that
his preferred route to provide additional easing would be
through buying more long-term Treasury securities.
He told reporters on a teleconference call the Fed should
only ease further if inflation ticks lower.
Highlighting the divide over how best to deal with concerns
about a softening recovery, Dallas Fed President Richard Fisher
said any further monetary accommodation would have as little
effect in boosting the economy as "pushing on a string."
"We've done our job. We've restored liquidity to the
market, we've leveraged up our balance sheets," Fisher, who
rotates into a voting slot on the Fed's policy panel next year,
told a business group in San Antonio, Texas.
Now, he said, it is time for lawmakers and regulators to
provide clarity on what costs businesses will have to bear as a
result of health care and financial reforms. Until then, U.S.
economic growth will remain sub-optimal, he added.
The Fed cut overnight interest rates to near zero in
December 2008 and has been promising to keep them ultra low for
an extended period since March 2009 in an effort to try to hold
down long-term rates. It has also expanded credit available to
banks by $1.7 trillion with purchases of mortgage-related debt
and longer-term Treasury securities.
Despite those measures, officials acknowledge the recovery
has flagged in recent weeks. Fed Chairman Ben Bernanke told
Congress on July 21 that the outlook was "unusually uncertain"
and that the central bank stood ready to ease monetary policy
further if the recovery withered.
Some Fed officials worry that if the recovery stumbles,
already low inflation could slow further, raising the risk of a
broad drop in prices that could further weaken the economy.
Consumer prices have fallen for the past three months and
in the 12 months to June, were up just 1.1 percent. Officials
would prefer to see inflation in a 1.5 percent to 2 percent
However, other policymakers are concerned the Fed's
extraordinarily easy money policies, the culmination of steps
aimed at buffering the economy from the worst financial crisis
and recession in decades, are sowing the seeds for inflation.
Kansas City Fed President Thomas Hoenig has dissented at
every policy meeting this year, saying the extended period
language is setting the stage for another boom-and-bust cycle.
Bullard said he is not inclined to join Hoenig in dissent,
preferring instead to persuade his colleagues through research
and debate to drop the low-rates vow.
The St. Louis Fed chief said he continues to view a gradual
recovery as the most likely course for the economy and that
more easing of financial conditions likely will not be needed.
But he said the Fed should be prepared for further actions
if unexpected shocks materialize.
(Additional reporting by Ann Saphir in San Antonio, Texas)
(Reporting by Mark Felsenthal; editing by Todd Eastham)