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Fed's Bullard Wants Faster Inflation Before Tapering QE

James Bullard
Scott Eells | Bloomberg | Getty Images
James Bullard

Inflation is the U.S. data "wild card" and needs to move closer to target before the Federal Reserve shifts towards a tapering of its bond purchase program, St. Louis Federal Reserve Bank President James Bullard told CNBC on Friday.

"One wildcard for the data in the U.S. is inflation. Numbers have come in quite low. Inflation has been, by our preferred measures been about 1 percent over the last year—way below our target," said Bullard.

(Read More: 'It's a Big Moment for Japan': Fed's Bullard)

"Before I am in favor of tapering I would like to see some assurance that inflation is going to move back towards target," he said.

U.S inflation fell to a two-year low of 1.1 percent earlier this month, at the sharpest pace since December 2008 due to the dip in the oil price. The fall led to speculation that the Fed would stay on its very easy monetary policy path, despite divisions among policymakers.

However, comments from Federal Reserve Chairman Ben Bernanke at the Joint Economic Committee of Congress on Wednesday rocked markets, as he hinted that policymakers might review the Fed's $85 billion-a month asset-purchase program in the next few meetings, should market conditions improve.

(Read More: Ignore Fed Hawks, Bernanke in Driving Seat)

Bullard said the inflation number had been on a downward trend and he would like assurance that it will return back to target before quantitative easing tapering is initiated.

"It could be that the pretty low numbers is just noise in the data, we could get another couple of months of the data, things could start to turn around and we start to feel more comfortable,"

"But if you look at the data over the last 18 months—it has been on a downward trend. We are down at 1 percent- that is a pretty low number for inflation targeting central bank, " he added.

Bullard also expressed his concern for older savers who are being hit by the Fed's ultra-low interest rate policy and said the extreme nature of this recession has caused the policy to be stretched out.

(Read More: What Central Bankers Can Learn From Volatile Markets)

"This is one thing I am concerned about, that our policy is punishing savers," he said.

"Here is what I would say, if it was a normal recession and recovery cycle you might lower interest rates for six, nine, or 18 months and then go back to normal, so there would a bad period where you have lower returns for the older saver cohort, but they would get back to normal after not too long," he said.

Bullard said it was a distributional consequence of the Fed's interest rate policy that he was "increasingly concerned" about.

"It [the recession] has been stretched out, we are talking four, five years, maybe a decade—if you have low returns for that period, this is really hurting that whole cohort of savers in that age group, so I am concerned about that part of the policy," he added.

By CNBC's Jenny Cosgrave. Follow her on Twitter @jenny_cosgrave.

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