A senior U.S. Federal Reserve official said on Thursday he thinks it is time to consider tapering off or scaling back a $600 billion bond-buying program because of an improved economic outlook.
The natural debate now is whether to complete the program or to taper off to a somewhat lower level of assets, St. Louis Federal Reserve President James Bullard said at a Chamber of Commerce breakfast held at Western Kentucky University.
Bullard said that he expects the topic to be discussed at a Fed meeting in March. He said he would be ready to scale back the program then.
If it was just me, I would make small changes to account for the fact that the outlook is better than it was at the time of the November decision, he told reporters after his speech.
Bullard, an academic economist, is not a voting member this year of the panel that sets interest-rate policy. He is seen as a centrist on the spectrum of Fed officials, which ranges from opponents of aggressive actions to support growth to advocates of accommodative policies at the other.
The Fed launched its bond buying program in November to buttress a weak recovery, struggling with high unemployment after the worst recession since the Great Depression of the 1930s.
The purchases are due to end midyear, and the Fed at its most recent policy meeting showed no sign as a body of backing away, although several policymakers have questioned the need for or the efficacy of the program.
Minutes of the Fed's January meeting showed a few officials wondering whether data showing a strong recovery would make it appropriate to consider reducing the pace or overall size of the program.
But other officials at the meeting said the outlook was unlikely to improve dramatically enough to justify any changes. There were no dissents from the Fed policy at that meeting.
Despite his confidence in the rebound, Bullard said that events in the Middle East and lingering worries about European government fiscal soundness plague the outlook.
We've got plenty of concerns out there about supply developments in oil markets, and you've still got brewing issues in Europe with respect to their sovereign debt crisis, he said. But I am saying that looking at the outlook today, it's better than it was in November.
Bullard said that despite his rosier outlook, further easing could never be ruled out.
The bond purchases are the Fed's second round of quantitative easing, dubbed QE2. Bullard said it has been an effective tool when interest rates are near zero.
Real interest rates declined, market expectations rose, the dollar depreciated and equity prices rose, he said.
The Fed cut short-term interest rates close to zero in December 2008.
Bullard said a jump in food and energy costs around the world could impact U.S. prices.
Perhaps global inflation will drive U.S. prices higher or cause other problems, he said.
U.S. inflation is near historic lows and Fed officials have until recently been worried that the U.S. economy could slip into an outright deflationary spiral. Bullard said he believes the disinflation trend has bottomed.
Inflation expectations are higher, which I think was a success of QE2 and if we do too much and don't pull back in time, then we can get more inflation than we intended, he said.
Bullard said adopting an explicit inflation target would be a better way of conducting monetary policy.
(Reporting by Mark Felsenthal, Editing by Kenneth Barry)