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WRAPUP 1-Fed's Bullard urges taper patience while inflation low

Alister Bull and Jonathan Spicer
Friday, 1 Nov 2013 | 12:03 PM ET

* Don't taper until inflation heading higher, Bullard says

* Says keep options open at all meetings, including December

* Plosser floats capping on asset purchases to ease exit

ST. LOUIS/NEW YORK, Nov 1 (Reuters) - The Federal Reserve should wait for signs that U.S. inflation is heading higher before starting to scale back its massive bond buying program, a senior U.S. central banker said on Friday.

However, St. Louis Federal Reserve Bank President James Bullard declined to say if he thought that the Fed's next meeting, in December, would be too soon to make the call.

"I would not want to speculate on what the committee will do in December," he told reporters after speaking with a financial advisers forum. "I have been an advocate that we keep our options open at every meeting."

Bullard, who voted this week to maintain asset purchases at an $85 billion monthly pace, is generally viewed as a centrist within the Fed's policy-setting Federal Open Market Committee.

The Fed, which has held interest rates near zero since late 2008 and quadrupled the size of its balance sheet to $3.8 trillion through aggressive asset purchases, opted to extend its policy support after a series of soft readings on the economy.

Bullard said the huge balance sheet has created risks of financial instability and said officials would like to "get out of the uncharted territory if we can".

But annual inflation, which was 1.2 percent in August according to the Fed's preferred measure of price pressures, remained too far beneath the central bank's self-imposed 2 percent medium-term goal, he said.

"I would like to see inflation coming back toward target before we make a decision to taper," Bullard said. "If we could see it coming back, get some evidence that it was coming back toward target, I think that would be helpful if we wanted to make a decision."

Economists now think the Fed will wait until 2014 before starting to wind down asset purchases, although a clear improvement in economic indicators in the next two months could revive prospects for action at the Fed's December 17-18 meeting.

SEARCH FOR EXIT

Another senior policymaker, Philadelphia Fed chief Charles Plosser, told CNBC television that one way to exit from bond buying would be to lift the open-ended nature of the program by announcing how much would be bought in total.

"I'm actually leaning to believe that's a better way to get out of this," Plosser said, adding a cap on quantitative easing would allow the Fed to reassess the economy once it is done.

"It would be worthwhile for us to consider how do we get out of this ... program in a sensible way without confusing it with our interest rate forward guidance."

Bullard said he did not support this approach, warning it would be impossible to know how the economy would be faring as buying came to an end, which would complicate communication. But he also stressed forward guidance.

The Fed has promised to hold rates ultra-low at least until unemployment hits 6.5 percent, provided the outlook for inflation remains under 2.5 percent. The U.S. jobless rate was 7.2 percent in September.

It argues that reducing bond buying will not alter the commitment to keep rates near zero, and a majority of officials forecast the first rate hike will not happen until 2015.

But financial markets have reacted sharply when the Fed has talked about changing the pace of buying, and Bullard said it was going to be challenging to sever the relationship.

"The Committee needs to either convince markets that the two tools are separate, or learn to live with the joint effects of tapering on both the pace of asset purchases and the perception of future policy rates," Bullard told the financial advisers.

(Writing by Alister Bull; Editing by Krista Hughes)