The U.S. Federal Reserve's aggressive bond-buying plan could soon backfire unless the central bank gradually changes course to head off inflation, a top Fed official known for his hawkish stance said on Tuesday.

Philadelphia Federal Reserve Bank President Charles Plosser said the $600-billion quantitative easing plan, known as QE2, would need to be reconsidered if the U.S. economy's current moderate recovery picks up steam.

The prospect of sustained price deflation -- a worry for Fed Chairman Ben Bernanke and other backers of the controversial QE2 plan -- is highly unlikely in part because the Fed's massive reserves will eventually flow out into the economy, Plosser added.

If the economy begins to grow more quickly and the sustainability of this recovery continues to gain traction, then the purchase program will need to be reconsidered along with other aspects of our very accommodative policy stance, Plosser said in a speech to the Risk Management Association.

The aggressiveness of our accommodative policy may soon backfire on us if we don't begin to gradually reverse course, he said.

On the other hand, if serious risks of deflation or deflationary expectations emerge, then we would need to take that into account as we adjust our policy stance.

Plosser's wide-ranging speech was his first public comment this year, in which he rotates into a voting slot on the Fed's policy-setting panel.

It comes as recent data show the U.S. economy is slowly recovering, but also as Fed officials increasingly rally behind QE2, which in early November set the Fed to purchasing Treasury securities in an effort to rejuvenate that recovery.

While some have credited QE2 for having already played a role in the rebound, Plosser said that argument likely stretches things. The policy may have affected financial markets, but it was too early to have had an impact on the real economy including jobs, retail sales and consumer spending, he told reporters.

In particular, the regional Fed president said he was watching inflation expectations and any downward trajectory in the unemployment rate for a clear signal to reverse Fed policy.


QE2, the second round of such easing, takes the Fed deeper into unchartered policy in an effort to fend off the threat of deflation and to lower unemployment, which dropped to a still-high 9.4 percent in December.

The central bank has kept interest rates near zero for more than two years to combat the worst recession in decades.

Critics of the bond-buying, including many economists and Republican members of Congress who want it curbed, say it lays the groundwork for inflation and troublesome asset bubbles.

While inflation is currently lower than the 1.5 to 2.0 percent level many monetary policymakers would prefer, it does not follow that sustained deflation is imminent or even likely, Plosser said, adding he expects inflation will be subdued in the near term.

Inflation should accelerate toward 1.5 to 2.0 percent over the next two years, Plosser forecast. He also predicted a reading of 2.5 to 3.0 percent GDP growth in 2010, and 3.0 to 3.5 percent GDP growth annually in 2011 and 2012.

Plosser said he expects the unemployment number to bounce around in the near term before gradually recovering. Even though the U.S. jobless rate dropped last month, the economy that month generated only a disappointing 103,000 jobs, and data showed a troubling rise in the number of those exiting the workforce.

Yet reports on U.S. consumer spending, manufacturing, and trade have in recent months suggested the world's biggest economy is healing, setting a nuanced stage for the Fed's next policy-setting meeting January 25-26.

Plosser last had a vote on the policy-setting Federal Open Market Committee (FOMC) in 2008. He and Dallas Fed President Richard Fisher, also a voting member this year, are seen as most likely to vote against the majority -- though Fisher said in an article on Monday that QE2 would likely run its course.

Unanimity is not the natural state of affairs in life -- nor is it inside the halls of the Federal Reserve, Plosser said Tuesday.

(Editing by Chizu Nomiyama)