HONG KONG - The Federal Reserve could bring forward the timing of the first rate hike of the cycle from late 2014 if recent data suggesting an improvement in the U.S. economy continues, St. Louis Federal Reserve Bank President James Bullard said Friday.

Bullard, who is not a voting member of the policy-setting Federal Open Market Committee, told reporters at a briefing here that the first hike could come in late 2013, while acknowledging the committee's end-2014 timeframe.

"The (FOMC) has said that the first rate increase will be late 2014 but there is a lot of uncertainty about that date. If we continue to get better data about the U.S. economy, I think the likely move would be to shorten the time until the first rate increase," he said.

"I think late 2013 could be the date of the first rate increase, but I am just one man and the committee's judgment is 2014."

Bullard warned the Credit Suisse Asian Investment Conference of the threat posed by inflation, arguing in response to questions from the audience that "abnormal" borrowing costs can't last for too long.

"Could we get a sharp rise in inflation? I think that's very much a concern in this environment," he said, noting the rising Chinese costs on the global and U.S. inflation outlook.

Bullard played down the oil price threat, arguing that prices at the pump would need to hit $5 per gallon "before you had an oil shock or energy shock behavior," but also made it clear that policy needs to return to a more normal footing in the coming years.

"One of challenges in the next few years is to find a path back to more normal monetary policy and interest rates. If we get into this situation of abnormal borrowing costs for a long period it could be distortionary for US economy," he said.

Bullard ruled out any need for a third round of quantitative easing barring a "significant deterioration" in either the U.S. economic or inflation outlook.

"I would advocate against further QE unless economic deteriorates significantly from where it is now I think we can afford to be on pause and assess the situation," he said.

He said that unemployment will come down "pretty slowly" over time even if the U.S. economy is expanding and said "we should be very careful about tying monetary policy to that variable (unemployment)."

Bullard also said Congress isn't taking the U.S. debt position seriously, and that this is clouding the economy's performance.

Bullard said in a speech to the conference earlier Friday that U.S. monetary policymakers must take care not to overcommit to an "ultra easy" policy, since although that has served the economy well it will not be appropriate as conditions change.

He also suggested the Fed would have to alter its recent policy of publishing individual member's forecasts, and should consider publishing a monetary policy report like other central banks.

Bullard has said he would have dissented on the current language saying the policy rate would remain exceptionally low through 2014, so it is not surprising he is worried about keeping policy too easy, although he acknowledged the aggressive stance worked.

"Indeed, the policy has been successful in the sense that the U.S. has not slipped into the scenario of a falling price level, which sometimes occurs after shocks of this magnitude," Bullard said. "But now, with the committee on pause, it may be a good time to take stock of whether we may be at a turning point."

"Macroeconomic prospects in the U.S. are looking somewhat brighter in 2012," he said. Warning that "the Committee is taking a substantial, but calculated, risk with the Federal Reserve balance sheet," Bullard said the pause from the "aggressive easing campaign" is important "to allow the Committee the chance to assess developments in the economy and observe the effectiveness of recent policy actions."

The Fed should proceed with caution since with many options available and some uncertainty about measurements of the economy, such as the size of the output gap, and the level of growth needed to reduce the unemployment rate, "it may be especially difficult to remove policy accommodation at the appropriate pace and at the appropriate time," Bullard said.

"Many of the further policy actions the Committee might consider at this juncture would have effects extending out for several years. As the U.S. economy continues to rebound and repair, those policy actions may create an overcommitment to ultra-easy monetary policy," he warned. "The ultra-easy policy has been appropriate until now, but it will not always be appropriate."

And although he acknowledged that "The ultra-easy policy has served us well in a difficult environment," the danger is that "overcommitting to the ultra-easy policy could well have detrimental consequences for the U.S. and, by extension, the global economy."

Bullard said the uncertainty about the U.S. outlook is reflected in the projections by FOMC members published for the first time at the January meeting.

"The amount of uncertainty attached to a projection of U.S. economic performance into 2014 reinforces the idea that much will change between now and then, and that policy will have to change as well to meet new macroeconomic conditions."

While the projections represent "a definite improvement in Fed communications," Bullard said, "I believe the projections will have to be done differently at some point in the future."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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