Posted by
alfredlester on Wednesday, November 18, 2009 4:54:56 PM
ST. LOUIS (Reuters) – A senior U.S. Federal Reserve official said on Wednesday the central bank may start tightening financial conditions by adjusting its extensive purchase programs, rather than by raising interest rates.
"The market&&9;s focus on interest rates is disappointing, given quantitative easing," Bullard said, according to excerpts of remarks prepared for delivery to a group of bankers. "Markets should be focusing on quantitative monetary policy rather than interest rate policy," he said.
"The main challenge for monetary policy going forward will be how to adjust the asset purchase program without generating inflation while interest rates are near zero," Bullard said business card.
Medium-term inflation hinges on what the Fed will do with this program, he said.
The Fed has committed to buy up to &&6;1.725 trillion in mortgage-related securities by the end of March.
Inflation is still low, but commodity prices are volatile and uncertainty over inflation is elevated compared with the fall of 2008, Bullard said.
The expansion of the Fed&&9;s balance sheet has helped restore financial health after the crisis, but it creates an inflation risk, he said.
(Reporting by Mark Felsenthal, Editing by Chizu Nomiyama)
Fed's Bullard: Shrinking reserves key to exit