The Federal Reserve should shift quantitative easing policies based on the U.S. economy's evolution, in the same way those changes guide interest rate policy, a top Fed official said on Thursday.
The quantitative policy should be conducted in a manner analogous to interest rate policy, St. Louis Federal Reserve Bank President James Bullard told an audience at St. Cloud State University.
This means adjusting the policy according to incoming information in the economy, said Bullard, who is voting on the Fed's interest-rate setting panel this year.
The Fed has cut interest rates to near zero and promised to keep rates exceptionally low for an extended period.
Bullard said the policy, along with about $1.7 trillion in long-term securities that the Fed has bought to give the economy additional help, is right for the current stage of the weak recovery.
You've got a super easy monetary policy right in place now, he said in response to questions after a speech.
I think that's appropriate as the economic recovery is taking hold ... but we're in the early stages yet, said Bullard, a voter on the Fed's interest rate setting panel this year.
At some point the Fed will have to begin reversing the easy money policy or run the risk of fueling inflation in the medium term, he added.
After the Fed chopped borrowing costs to rock-bottom levels, it started buying mortgage-related debt to provide additional support for the U.S. economy, which was reeling from its most damaging financial crisis in generations.
Bullard has long advocated actively selling off the assets as warranted by developments in the economy when the buying program ends this month.
He is at odds with Fed leaders, who advocate asset sales only after other steps to drain reserves from the financial system and when the recovery is well established.
However, Bullard is among a group of policymakers who worry that the Fed's massive supply of money to the economy poses an inflation risk. One policymaker dissented at the Fed's January meeting against a decision to maintain the Fed's low-rate, long-time promise, saying conditions have improved and the central bank needs to keep its options open.
Turning to regulatory reforms that Congress is weighing, Bullard warned against stripping the Fed of oversight powers.
The Fed should remain involved with smaller bank regulation so it has a view of the entire financial landscape and does not become biased toward the large, mostly New York-based institutions, Bullard said.
Subjecting the Fed to greater control by Congress could have negative consequences for the U.S. and the global economy, he said.
In the U.S., erosion of Fed independence could result in a 1970s-style period of volatility, he said.
While there has been widespread criticism of the Fed for creating conditions that led to the housing bubble and regulatory lapses, the central bank may gain powers as a result of regulatory reforms.
Lawmakers are debating whether to locate a stronger consumer protection agency within the Fed and give the Fed authority to police the health of the broader financial system.
Even so, one proposal would allow the Congress to review the Fed's monetary policy decisions, something to which policymakers have strenuously objected.
(Reporting by Mark Felsenthal; editing by Jeffrey Benkoe)