Fed's Bullard: Low Inflation Means Fed Can Stay Aggressive

Source: Federal Reserve | Flickr

Low U.S. inflation means the Federal Reserve can stick to an aggressive bond buying campaign if it decides that is warranted, even though the nation's jobs market has perked up since the program was launched, a senior central banker said on Monday.

"Labor market conditions have improved since last summer, suggesting the Committee could slow the pace of purchases, but surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame," said St. Louis Fed President James Bullard.

Bullard is a voting member of the Fed's policy-setting committee this year.

(Read More: Fed's Bullard Wants Faster Inflation Before Tapering QE)

The comments reiterate an argument that Bullard has made several times recently after data showed U.S. inflation remained well under the Fed's two percent target. The Fed's preferred gauge of price pressures, the PCE price index, was up 0.7 percent in April compared to a year ago.

Bullard acknowledged that U.S. unemployment had declined since last summer, the period when the Fed was reviewing data that led it to announce a third round of bond buying in September, but his remark placed more weight on inflation.

"Inflation in the U.S. has surprised to the downside," Bullard told an economic conference in Montreal." This configuration of data suggests that the Federal Open Market Committee (FOMC) can continue to pursue its aggressive asset purchase program," he said.

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Financial markets were rocked by talk of an imminent tapering in asset purchases, currently $85 billion a month, after comments to Congress by Fed Chairman Ben Bernanke on May 22 that the central bank could scale back buying at the next few meetings.

Jobs data for May came in around expectations, showing 175,000 new non-farm payroll positions were added last month. But other economic data has been somewhat mixed, and the Fed is not widely expected to announce any such move at its next meeting, on June 18-19.

It is also expected to recommit to keeping interest rates near zero until unemployment has hit 6.5 percent, so long as inflation stays under 2.5 percent. U.S. unemployment in May was 7.6 percent.

(Read More: For Some Investors, Federal Reserve Can Start Tapering Now )

Fed officials are divided over their ultra-easy monetary policy and some warn it could stoke future inflation and financial instability.

Bullard said excessive risk-taking, which sparked a severe U.S. recession between 2007 and 2009 that sent unemployment soaring, was a serious concern. But he played down the evidence that it was again taking hold in U.S. financial markets.

"So far, it appears that this type of activity has been limited since the end of the recession in 2009," he said. "Still, this issue bears careful watching: Both the 1990s and the 2000s were characterized by very large asset bubbles."