WASHINGTON: The Fed needs to mount a clear defense of its 2 percent inflation target and stop raising rates until the pace of price increases strengthens, St. Louis Fed President James Bullard said on Thursday.
The central bank risks losing credibility, and perhaps triggering a recession, if it continues to insist on "normalization" without better evidence that prices are firming, he said in an interview with Reuters.
"If you are going to have an inflation target you should defend it. If you say you are going to hit the inflation target then you should try to hit it and maintain credibility," Bullard said in an interview with Reuters.
A recent drop in the Fed's preferred measure of inflation means "we more or less lost all the progress that we made the last two years" toward the 2 percent goal, Bullard said. Continuing to raise interest rates in that environment "can send a signal to markets that the inflation target is not that important."
He said colleagues who insist the weak inflation numbers are to be blamed on large, one-off price declines in particular components of the economy were too "finely chopping" their analysis, and overlooking the fact technology or some other force is restraining prices.
(Reporting by Howard Schneider; Editing by Chizu Nomiyama)