PADUCAH, Ky., Aug 14 (Reuters) - The Federal Reserve could increase the risk that the U.S. economy suffers a damaging bout of deflation if it tapers its bond buying too aggressively, a senior central banker said on Wednesday.
St. Louis Fed President James Bullard also said that he had not yet made up his mind if next month’s Fed policy meeting was too soon to opt to start scaling back purchases, from a current $85 billion monthly pace.
“It is possible if you pull back too quickly you put more downward pressure on inflation and end up with inflation running below 1 percent. And then I think at that point, deflation possibilities would start to arise,” he told reporters.
“We’re not in that situation right now, but that is one scenario that I would worry about,” he said, after delivering a speech.
Labor markets have improved substantially since September, when the Fed’s current campaign of quantitative easing was announced, he noted. But growth is not strong and inflation is only around 1 percent, or half the Fed’s 2 percent target.