Fed's Bullard Favors Bond Buys If Inflation Continues Decline

James Bullard
Scott Eells | Bloomberg | Getty Images
James Bullard

A top Federal Reserve official said Wednesday that If inflation continues to fall he would be willing to increase the pace of the central bank's bond-buying to defend its 2 percent inflation target.

St. Louis Fed President James Bullard cautioned that further accommodation in monetary policy is not needed yet, however, and said he does not currently fear deflation.

"If inflation continues to go down, I would be willing to increase the pace of purchases," Bullard told reporters after a speech at the annual Hyman P. Minsky Conference in New York.

The Fed has an official 2 percent inflation target and has said that, as long as inflation expectations do not breach 2.5 percent, it will keep benchmark interest rates near zero until unemployment falls to 6.5 percent.

(Watch More: Fed's Bullard Discounts Weak Job Report)

"I'm very willing to defend the inflation target from the low side," Bullard said. "If we say 2 percent, we should hit 2 percent."

The comments from Bullard, a pragmatic centrist and a voter on Fed policy this year, provide an interesting twist to a policy debate that has recently been focused on what level of improvement in the labor market would prompt the central bank to dial down the purchases.

The Fed's preferred measure of inflation, the Personal Consumption Expenditures rate, is around 1.3 percent and is not expected to rise much over the next two years, in large part because of the millions of unemployed workers.

The Fed is buying $85 billion a month in Treasurys and mortgage-backed securities through the latest round of quantitative easing, known as QE3, as it tries to bolster the economic recovery.

An inflation hawk, Bullard said he would prefer to ramp up if needed by buying Treasurys rather than MBS.

The central bank has said it will keep buying bonds until the labor market outlook improves substantially; financial markets have began turning their attention to how long purchases might go on.

In his speech, Bullard said the Fed should remain focused on inflation and resist putting more weight on the employment part of its dual mandate.

Unlike most central banks in the developed world, the Fed is responsible for both maintaining price stability and achieving full employment. Since the Great Recession, it has eased monetary policy to unprecedented levels to lower the unemployment rate, which stood at 7.6 percent last month.

"People have been focusing on employment a lot but have maybe gotten a little bit blinded about the inflation numbers that have come in very low," Bullard told reporters.