St. Louis Federal Reserve chief James Bullard urged the U.S. central bank on Tuesday to begin reversing its campaign of monetary easing, saying it could trim its $600 billion bond-buying program by $100 billion.
Bullard, who does not have a vote on Fed policy this year, added that U.S. policymakers may not be willing or able to wait for all global uncertainties to be resolved before they begin normalizing their very loose monetary policy.
One of the things that I'm concerned about is that policy is so easy right now that we have to get started on the process of getting back to normal because it will take a long time, Bullard told reporters on the sidelines of an economic conference in Prague on Tuesday.
When asked if he thought that process should begin now, he said: Yes, we're still buying treasuries. We're feeding the fire at this moment.
Bullard, seen as a centrist on the policy-setting committee, said the Fed could start tapering off its asset purchases and then pause for several policy meetings before taking further tightening steps.
His comments contrasted with comments from other senior Fed officials who have said this week only that they did not see a need for another round of asset buying.
Bullard's comments drove the euro to a session low against the dollar. The single European currency was trading bid at 1.4060 at 1315 GMT.
He added that there was a difference of opinion on the speed of reversing monetary easing and cutting back the asset purchasing program.
I think it could be on the order of $100 billion less than what we had initially thought, but I would leave that up to how the rest of the committee would want, Bullard told reporters.
Still, analysts say it is highly unlikely the Fed will stop short of purchasing the full $600 billion in U.S. government bonds, and top Fed officials said on Monday the economy still needed support.
Bullard said in late February that he would support scaling back the central bank's $600 billion bond buying program in light of a strengthening economy.
Even before the Fed launched the current round of monetary easing in November, Bullard was arguing that the central bank should move policy in increments of $100 billion worth of securities purchases from meeting to meeting.
We're purchasing securities at a rapid rate. If we stop that process and we just let the balance sheet stay at a high level and keep the policy rate near zero, and keep our extended period language, we could pause for a couple of meetings like that, he said on Tuesday.
Then we could start to take other measures to start to reduce the size of the balance sheet, to think about possible language changes with the extended period, to eventually get the policy rate off zero.
Risks clouding the outlook include the turmoil in the Middle East and North Africa, the aftermath of the Japanese tsunami, the European sovereign debt crisis and the U.S. fiscal situation and possibility of a government shutdown, Bullard said.
Because we are so accommodative right now, the FOMC may not be willing or able to wait until every single global uncertainty is resolved before we can begin normalizing policy, he said.
If we wait too long we will get a lot of inflation in the United States and around the world.
Still, he said that the most likely prospect was that the main risks for the outlook would be resolved without becoming global macroeconomic shocks.
The Fed has kept short-term interest rates near zero since December 2008 and has bought more than $2 trillion in long-term securities to push borrowing costs down further and boost recovery from the 2007-2009 recession.
Bullard said that the process of normalizing policy would still leave unprecedented policy accommodation on the table, and that growth prospects remained reasonably good and had improved since last summer.
As 2011 started we were about 18 months past the end of the recession, and that's about the kind of timing when I would expect the economy to pick up and start growing fairly rapidly, he said.
But he said any failure to address the U.S. fiscal situation would pose a risk to U.S. and global recovery.
President Barack Obama's Democrats on Monday offered to cut another $20 billion from the U.S. budget in an attempt to reach a deal with congressional Republicans that would avert a government shutdown.
(Additional reporting by Jason Hovet; Editing by Hugh Lawson)