Fed's Bullard: Inflation low for now, but could be excessive in the future

Adam Jeffery | CNBC

St. Louis Fed President James Bullard

The low U.S. inflation rate is a worrisome sign for the country's economy, and there is not much evidence it is heading higher, a senior U.S. Federal Reserve official said on Wednesday, adding that price pressures would be under scrutiny as policymakers weigh tapering monthly bond purchases.

"Inflation has been running very low. I have been concerned about low inflation," James Bullard, president of the St. Louis Fed, told a Rotary Club luncheon in Paducah, Kentucky. "There has not been much indication, so far, that it has been ticking back up toward target."

Inflation measured by the PCE price index, the Fed's preferred gauge, is around half the level of the U.S. central bank's 2 percent target. The Fed last month explicitly nodded to the risks that prolonged low price pressures would pose for the economy.

The Fed's policy-setting "committee has set a target. They've set it at 2 percent," Bullard said. "Once you've set it, you had better have some credibility that you are going to hit it."

The Fed plans to taper bond purchases from an $85 billion monthly pace later this year, provided the economy picks up as expected. Financial markets currently expect that process to begin at its meeting next month.

In considering whether to cut back on bond-buying, Bullard said the Fed would review developments in the labor markets, where unemployment has fallen since the latest bond purchase campaign began last September. It would also review growth, which he said has been "not so great" over the last three quarters, and it will review the evidence on inflation.

(Read more: Too early to lay out asset-buying exit: Fed's Lockhart)

Bullard, a voting member of the committee this year, dissented at the June meeting, saying that the Fed should have signaled more strongly its willingness to keep its stimulus in place out of concern inflation was not heading higher.

Bullard has been particularly outspoken on the issue, and released an unusually sharp statement to explain his decision, although he voted with the majority at the July meeting after the inclusion of a low inflation warning in the statement.

Other Fed officials have also said that they want assurance that low inflation is indeed transitory, as their forecasts predict.

(Read more: Looking for Fed clues? Forget about Jackson Hole)