LOUISVILLE, Ky. — St. Louis Federal Reserve Bank President James Bullard Thursday said the debate over whether to scale back asset purchases will depend on "whether inflation naturally returns to target" and other economic data in the second half of the year.

"It is especially important to see if better macroeconomic growth materializes in the months and quarters ahead, and whether inflation naturally returns toward target," Bullard said in prepared remarks in Louisville, Ky.

A voter on the policymaking Federal Open Market Committee this year, Bullard noted current inflation is low. Inflation expectations have declined since March, although they have increased from recent lows, he said.

"The Committee would not normally remove policy accommodation in an environment where inflation is below target and is projected to remain there," he said.

A key inflation issue for the tapering debate is whether low levels of inflation will move up toward 2% in the coming months.

If the answer is yes, Bullard said, the FOMC could reduce the pace of asset purchases without worrying about pushing inflation even further below target. "If no, then inflation may be pushed even lower by a decision to taper and hence the risk of deflation may increase," he added.

Bullard added that recent data points to higher than anticipated second quarter GDP, but he also cautioned against just using growth outlooks to make monetary decisions. "I think caution is warranted in taking policy action based on forecasts alone," he said.

Bullard noted that along with his own forecasts, FOMC forecasts and many private sector forecasts have tended to be too optimistic over the past several years. "The real GDP forecasts, in particular, have generally been too high," he said.

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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