NEW YORK – With monetary policy quite accommodative and the economy performing better than expected since Fall, the Federal Open Market Committee is “on pause,” but needs to be wary that it doesn’t spark inflation, Federal Reserve Bank of St. Louis President James Bullard said Wednesday.

The biggest risk in pausing “lies in potentially overcommitting to the ultra-easy monetary policy, reigniting the global inflation debacle of the 1970s,” he said at a Dialogue with the Fed event in Louisville, according to a Fed release.

Actions the Fed has taken since 2008 “remain impactful today,” as the fed funds target rate is near zero, the Fed balance sheet remains large, “Operation Twist” is ongoing, and the FOMC anticipates economic conditions to warrant exceptionally low levels for the rate at least through late 2014.

“Meanwhile, the U.S. macroeconomic data have been stronger than expected as of last autumn,” he said. “The ultra-easy monetary policy—much of which is still impacting the U.S. economy—along with better-than-expected data over the last nine months combine to put the FOMC on hold, or pause, in its aggressive easing campaign,” Bullard said.

Although, he said, monetary policy “has been appropriate so far,” he worries the FOMC could “pursue” accommodation “too aggressively” and set off “a 1970s-type experience,” with recessions, double-digit inflation and double-digit unemployment. “The lesson was clear,” Bullard said. “Do not let the inflation genie out of the bottle.”

Trying to do too much with policy risks “monetary instability” at home and abroad, he said.

If more negative shocks arise, Bullard said, “the Committee can respond as appropriate to a significant deterioration relative to the current forecast.”

Prices currently seem “appropriate” at a 2% inflation rate, he noted.

Turning to unemployment, Bullard commented, “It may be better to focus on labor market policies to directly address unemployment instead of taking further risks with monetary policy.”

Bullard suggested improving communication “by producing a quarterly report similar to those produced by other central banks,” naming the Bank of England’s “Inflation report” as an example. “A report of this type could potentially lay down a benchmark ‘Fed view’ on the key issues facing the U.S. economy,” Bullard said, adding that “FOMC participants could point out where their views differ from the benchmark.”

If coordinated with Fed Chairman Ben Bernanke’s quarterly press briefings, such a report could provide “a broader discussion of the U.S. outlook,” Bullard said.

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