WASHINGTON — Now that the big risk of contagion from Europe has diminished, the U.S. could keep benefiting from a Europe "on hold" through the German elections in the fall, St. Louis Federal Reserve Bank President James Bullard said Wednesday.

Interviewed on Bloomberg Radio, Bullard said he thinks the Fed has policy "about right" now and that the low inflation rate means there is no hurry to worry about tapering large asset purchases.

After Fed Gov. Daniel Tarullo said earlier in the day on CNBC that he is wary about any slowdown like the one seen in at least three previous instances, Bullard said, "We're going to just have to see how the spring develops here." But he added, "It's true that it's happened the last couple of years but that's probably not a good reason to think it would happen again this year."

But there is a big factor that is not present to the same extent now as in some of the earlier slowdowns, Bullard said: in 2011 and 2012, "The European sovereign debt crisis was much hotter at that point than it is right now.

"To the extent the European debt crisis continues to stay more or less on hold, at least with respect to possible financial contagion to the U.S., if that probability stays at a relatively low level, then I think we'll be in great shape here in the U.S."

He continued, "Europe is in recession and of course that's not good," but "from our perspective the main risk was that there'd be some sort of major financial catastrophe that would come over to the U.S. and I think the probability of that is lower right now than it's been in the last two years."

The benefit of a Europe "on hold" may persist, he said. "One thing about the calmer situation in Europe is that, right now, I'm thinking this could continue through the German elections in the fall." If that proves true, "That will help us a lot."

Bullard said so far, in the first quarter, "The surprise has been on the upside," and should growth firm, the improvement in unemployment could accelerate later this year. Long term, he said his projection is that it will take about two years, until the fourth quarter of 2014, for the unemployment rate to improve to 6%."

He said he appreciates that Fed Chair Ben Bernanke, at his last news conference, said "we would try to adjust the pace of purchases in response to economic conditions, which is very much what I was saying in 2009."

"I do think the committee in general has come around more to that view than they were originally," Bullard said. "You can't just be saying that we're not going to react to data."

Even so, "The stance of policy is appropriate at this time," he said, generally speaking. "Even though I'm an inflation hawk, if you look at inflation it's pretty low right now."

Inflation will head higher, from the current 1.3%, "toward target," he said, "but we're going to have to get some data on that and see that. So right now I think the Fed has room to maneuver on this policy.

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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