"Pretty high hurdle" to QE3: Fed's Bullard

NEW YORK (Reuters) - Federal Reserve policymakers still see a "pretty high hurdle" before they would unleash a third round of quantitative easing, or QE3, a top Fed official said on Friday.

Speaking two days after the U.S. central bank decided to take a more modest policy step to help the flailing economic recovery, St. Louis Fed President James Bullard said the Fed has done "what it can do."

"QE3 I think is viewed as still having a pretty high hurdle. We can do that, and I think it would be effective, but we would be taking a lot more risk on our balance sheet and we'd be going further into unchartered territory," Bullard said on Bloomberg TV.

"Right now we've got a weaker economy, but still we're projecting a 2 percent growth out into the future," said Bullard, who does not have a vote at the Fed's policy meetings this year.

The Fed on Wednesday decided to extend through the end of the year a bond maturity-extension program called Operation Twist, in which the central bank replaces short-term debt it holds with longer-term securities. It opted not to do QE3, which would involve outright large-scale purchases of securities.

Bullard, the first Fed policymaker besides Chairman Ben Bernanke to speak publicly after this week's meeting, said it is a "contentious time" for policymaking and warned that the Fed's near-zero interest rate policy may start to distort the U.S. economy.

"I am worried that you get three and a half years at zero rates and promises to keep it at zero for this much longer, that you're starting to distort the economy in ways that we're not used to in the past," he said.

"This is getting outside of normal business cycle adjustments."

The Fed has kept rates ultra low since late 2008 and has made a conditional pledge to keep them there through at least late 2014. It has bought more than $2 trillion in assets in two rounds of quantitative easing, or QE1 and QE2, to battle the recession.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)