Fed's Bullard: "Natural" to debate completing QE2

BOWLING GREEN, Kentucky (Reuters) - A senior U.S. Federal Reserve official said on Thursday that an improved economic outlook makes it natural for policy-makers to reconsider whether to complete or scale back a $600 billion bond buying program.

"The natural debate now is whether to complete the program or to taper off to a somewhat lower level of assets," St. Louis Federal Reserve President James Bullard said at a Chamber of Commerce breakfast held at Western Kentucky University.

Bullard said that he expects the topic to be discussed at the Fed's next meeting in March.

Bullard, an academic economist, is not a voting member of the Fed's interest rate setting panel this year. He is seen as being a centrist on the spectrum of Fed officials, which has opponents of aggressive Fed actions to support growth at one end and advocates of accommodative policies at the other.

The Fed launched its bond buying program in November to buttress a weak recovery. The purchases are due to end mid-year and at recent Fed policy meetings the central bank as a body has shown no sign of backing away from the purchases, although members have debated phasing it out ahead of schedule or reducing monthly purchases.

Bullard said global inflation could impact U.S. prices.

"Perhaps global inflation will drive U.S. prices higher or cause other problems," he said.

Bullard suggested that one way to look at U.S. inflation could be to gauge whether the global economy is performing at full potential, rather than just looking at the U.S. economy. While the U.S. economy is underperforming, the global economy is very close to or exceeding its full potential, he said.

"The global output gap is much narrower or even positive; this would then be interpreted as putting upward pressure on inflation," he said.

He added that he is not necessarily an advocate of this view. One study has shown that the global output gap did not impact euro-zone inflation in the 1979-2003 period, but he noted that the global economy has become more interconnected since then.

Bullard further said that adopting an explicit inflation target would be a better way of conducting monetary policy, a likely reference to recent discussions that returning to the gold standard would be a better approach.

Minutes of the Fed's January meeting showed that some policy-makers questioned the efficacy of the bond buying initiative. A few also wondered whether data showing a strong recovery would make it appropriate to consider reducing the pace or overall size of the program.

But other officials at the meeting said the outlook was unlikely to improve dramatically enough to justify any changes. There were no dissents against keeping Fed policy on track at the January meeting.

Bullard said he believes the bond buying has been an effective tool when interest rates are near zero.

"Real interest rates declined, market expectations rose, the dollar depreciated, and equity prices rose," he said.

The Fed cut short-term interest rates close to zero in December 2008.

(Reporting by Mark Felsenthal, Editing by Chizu Nomiyama and W Simon )

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