Many religiously monitor and analyze labor market data for clues on how long the Federal Reserve will maintain its aggressive measures to help the recovery, but one influential Fed official Wednesday said he would support increasing the bond buying program to arrest a continued decline in inflation.
"People have been focusing on unemployment a lot but maybe are a little bit blinded that the inflation numbers have come in very low," St. Louis Federal Reserve Bank President James Bullard told reporters on the sidelines of the Minsky conference hosted by the Levy Institute in New York.
During the question and answer session with the audience, Bullard noted that inflation, as measured by the personal consumption expenditures index, is running very low right now.
"I'm getting concerned by that," Bullard said, adding that inflation running below the policy-setting Federal Open Market Committee's price stability target gives the group "room to maneuver."
Pressed by reporters to indicate exactly what "room to maneuver" means, Bullard - a voter on the FOMC this year - said, "I think if inflation continued to go down I'd be willing to increase the pace of (asset) purchases.
"As it stands right now inflation has drifted lower on a PCE basis. This is not what I expected and I think inflation should be closer to target than it is."
Asked if his decision to adjust the $85 billion a month in bond buying is tied to just price stability, and not the outlook for the labor market as the FOMC has said, Bullard said he looks at all economic data "But I'm going to put a lot of weight on inflation that's for sure, and I'm very willing to defend the inflation target from the low side.
"If we say 2%, we should get 2% and we shouldn't let that lapse," he said. "We should defend our inflation target from the low side."
Bullard said while he is not advocating the FOMC up its asset purchases tomorrow, it does have the capacity to increase the size should it decide to with causing market imbalances.
If Committee where to make such a decision, Bullard said he would favor buying more U.S. Treasury securities.
He stressed that the current fall in prices is not on par with that seen in the summer of 2010, when the Fed unveiled a $600 billion asset purchase program, so it is "too early" for to talk about deflation.
However, "if it doesn't start to turn around here soon, I think we'll have to rethink where we are on our policy," Bullard said.
Bullard has said he favors tying the pace of the current asset purchase program to economic conditions, and argued that where inflation is relative to target is one of those conditions.
At the same time, he cautioned that conditions could turn around and PCE could be back up closer to target. "That is what I expect to happen but so far it hasn't been happening," Bullard said.
Responding to questions from the audience, Bullard said he does not believe there is nothing that can be done to address the problems in the market, but the issue is that "maybe you shouldn't lean on the monetary policymaker to do a lot about it."
What is needed is a more targeted approach to helping those without a job, Bullard said, since the impact of monetary policy is too indirect.
Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.