FARMINGTON, Missouri (Reuters) - Expect no action for a while after the Federal Reserve ends its $600 billion bond buying program in June, a top Fed official said on Monday.
"Past behavior of the (Fed) indicates that the committee sometimes puts policy on hold," St. Louis Federal Reserve President James Bullard said told the Mineral Area College Foundation. "A pause allows more time to assess the strength of the economy."
While waiting to see how the economy evolves, the Fed would hold interest rates near zero, said Bullard, who is not a voter on the central bank's policy-setting panel this year.
Being on hold also signals no change to the Fed's pledge to hold rates extremely low for an extended period, he said.
It also means reinvesting securities to keep the Fed's much-expanded balance sheet at whatever level it reaches after the bond-buying initiative comes to a close, likely above $2.7 trillion, he added.
Bullard cautioned that stripping energy and food costs from inflation measurements may understate inflation. Fed officials have argued that despite recent jumps in the prices of commodities and food, inflation is in check because underlying measures have climbed only modestly from historic lows.
Commodity prices have logged "dramatic" increases in recent months, he said.
"Ignoring energy prices in a price index may systematically understate inflation for many years," he added.
Many Fed officials believe the best way to measure whether their efforts to keep inflation at bay are working is to look at measures of underlying inflation, because that is a better gauge of where inflation is headed.
Bullard further renewed his call for the Fed to adopt an explicit numerical inflation target.
Fed Chairman Ben Bernanke signaled after the Fed's last meeting at the end of April that the U.S. central bank is in no hurry to reverse its massive support for the modest U.S. economic recovery in which unemployment remains above what Fed officials believe is the norm. That support includes rock-bottom benchmark interest rates and will amount to $2.3 trillion in purchases of longer-term assets when the current program winds up.
Many economists and some Fed officials are concerned that inflation risks are rising. Even though oil prices have moderated recently, there is popular concern that the Fed is ignoring overall inflation because prices for gas and many food items are noticeably higher to many consumers.
Fed officials such as Bernanke have argued that higher energy prices reflect increased global demand from emerging markets such as China, India, and Brazil, rather than too-easy monetary policy in the United States. The chairman and others also say that there is no indication consumers or businesses expect inflation in the future.
However, Bullard said recent events show so-called core inflation that strips out volatile food and energy prices is no longer an accurate gauge of trends and raises doubts in the public's mind about the Fed's effectiveness.
"This is hurting fed credibility to be talking about core inflation when everyone sees headline inflation," Bullard said.
"Too much attention to core inflation can mislead policy," he said.
(Reporting by Mark Felsenthal; editing by Gary Hill)