February 19, 2010 / 1:31 AM / 10 years ago

Fed's Bullard: Inflation expectations rising

MEMPHIS, Tenn., Feb 18 (Reuters) - A senior U.S. Federal Reserve official sounded a warning on Thursday that inflation expectations are rising, while saying the economic recovery remains on track, though it has a long way to go.

“Labor markets remain weak and are at best stabilizing,” St. Louis Federal Reserve Bank President James Bullard said in remarks prepared for delivery to the Economic Club of Memphis.

The Fed has chopped interest rates to near zero percent and flooded financial markets with unprecedented amounts of cash to buoy the economy through a punishing recession. The U.S. central bank earlier on Thursday raised its discount rate, the rate it charges for emergency loans to banks, in keeping with healing financial markets, stressing that it was not a move to tighten financial conditions.

Policy makers have said their willingness to hold benchmark borrowing costs very low for an extended period hinges in part on inflation expectations that remain well anchored.

Bullard, a voter on the Fed’s interest rate-setting panel this year, said the gap between inflation protected securities and other Treasury securities has widened, a sign that inflation expectations are creeping up.

Turning to a debate in Washington over financial regulatory reform, Bullard said the Fed needs broader regulatory authority to cope with emergencies down the road.

“A future Fed, with appropriately broad regulatory responsibility, may be able to head off a future crisis,” he said.

Many U.S. lawmakers of both political parties have criticized the Fed for failing to anticipate or prevent the turmoil. Some legislative proposals would strip the Fed of its direct oversight powers over banking firms. (Reporting by Mark Felsenthal; Editing by Leslie Adler)

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