Low readings on inflation mean that the U.S. Federal Reserve can be patient on deciding when to scale back its pace of asset purchases, a senior Fed official said on Friday, cautioning that he would not back action until price pressures picked up.
"While I expect inflation to rise during the coming quarters, I want to see evidence of such an increase before endorsing less accommodative policy action by the FOMC," James Bullard, president of the St. Louis Federal Reserve, said.
Bullard said earlier on Friday in an interview with Bloomberg television that the Fed could still scale back its massive bond-buying campaign at its next meeting, at the end of October, if the data was strong enough.
The Federal Open Market Committee, the Fed's policy-setting body, on Wednesday voted to continue to buy bonds at a monthly pace of $85 billion.
Bullard said the prospects for tapering would harden if U.S. payroll and unemployment data recovered further.
"To the extent that these two important labor market indicators continue to show improvement, the likelihood of tapering policy action will continue to rise," Bullard said in remarks to the New York Association for Business Economics.
Bullard, a committee voter this year, supported the decision on Wednesday not to alter the current pace of bond purchases.
The move stunned financial markets, which had expected a modest adjustment that would have signaled the beginning of the end to a phase of ultra-easy U.S. monetary policy that has already lasted five years.
"The empirical evidence from these two episodes provides striking confirmation that changes in the expected pace of purchases act just like conventional monetary policy," he said.
Defending their action, Bullard noted that policymakers were forced to curb 2013 and 2014 growth forecasts, as well as expectations for inflation, which has challenged the confidence they felt in June that the second half would be stronger.
"Normally, the committee would not want to reduce policy accommodation in this situation," he said.
The sharp market reactions in both June and September as investors recalibrated expectations for future Fed bond buying also showed that this unconventional tool was just as powerful as conventional adjustment in Fed interest rates.
"The empirical evidence from these two episodes provides striking confirmation that changes in the expected pace of purchases act just like conventional monetary policy," Bullard said.
Bullard is usually seen as a policy centrist, but has become one of the central bank's most vocal doves due to concern that inflation remains too far beneath the Fed's goal of 2 percent, which he worries could lead to damaging deflation.
"The main macroeconomic surprise in the U.S. since September 2012 has been a lower rate of inflation," said Bullard, who dissented in June because he wanted a firmer commitment from the Fed to defend against price pressures slackening too far.
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