Letting Bush Tax Cuts Die 'Not a Good Plan': Fed's Bullard

Allowing the Bush tax cuts to expire would be a mistake with the economy trying to grow, James Bullard, president of the Federal Reserve Bank of St. Louis, told CNBC Friday.

St. Louis Fed President James Bullard revived investor worries of U.S. deflation risk.

A series of tax cuts backed by former President George W. Bush in 2001 and 2003 are set to expire, with most likely to be renewed except the relief given to those making more than $250,000.

President Obama supports eliminating tax cuts for the highest earners, but some in Congress have resisted, saying tax increases would stymie growth.

"Increasing taxes while you're trying to get the economy to recover is not a good plan," Bullard said in an interview.

His comments echo those of Deutsche Bank analysts, who said in a research note earlier this week that killing the top-tier tax cuts would halt the economic recovery by 2011.

In other matters, Bullard said the Federal Reserve should have a plan for significant quantitative easing if deflationary expectations in the US continue,

On Thursday, Bullard released a paper warning that the weak US economy risks tipping the country into a Japan-like deflation period.

"I call for a plan to have significant easing if the situation arises," Bullard said in the CNBC interview.

"I'm still an inflation hawk but … we're in a low side right now," he said, explaining that the consumer price index, excluding food and energy, has been coming down.

If the economy continues to recover in the second half, "this will all go away," but meanwhile there must be a plan B to deal with deflationary expectations, Bullard said.

• Poll: Let the Bush Tax Cuts Expire?

"The academic literature says that when you get below a certain inflation rate you have to get off interest-rate targeting," he said, adding that the Fed's policy should turn more towards quantitative easing — a policy where central banks increase the money supply through other means than interest rates, such as buying government debt.

The Bank of England's Monetary Policy Committee (MPC) has switched its asset-buying program on and off, depending on economic circumstances, which is a better policy than the US one, Bullard noted.

"We just did a lot and then we just kind of stopped," he said. "If you look at the MPC in the UK, it's much more about adjusting when problems come in."

Interest-rate targeting will just reinforce expectations that prices will fall, Bullard said.

"If we promise to stay at zero (rate) for 10 years, it's going to be Japan," he said.

European officials have dealt well with the debt crisis but now it remains to be seen if austerity programs will work, Bullard added.

"I do think the Europeans have done a reasonable job in trying to contain the crisis," he said. "I think we're at the end of the beginning on sovereign debt crisis in Europe … now we have to see if countries will follow through (with reforms)."

—Staff writer Jeff Cox contributed to this report.

• Read Bullard's Full View Here