(Adds further comment on policy)
By Howard Schneider
WASHINGTON, July 30 (Reuters) - The Federal Reserve should start reducing its $120 billion in monthly bond purchases this fall and cut them "fairly rapidly" so the program ends in the first months of 2022 and paves the way for an interest rate increase that year if needed, St. Louis Federal Reserve president James Bullard said on Friday.
In what amounted to a warning that his Fed colleagues risked a "scramble" to hike interest rates - and possibly spark a recession - if inflation remains high, Bullard said it was time to start accounting for that risk now.
"We are tilted too much to the dovish side," Bullard said in comments to reporters, urging the Fed to decide at its September meeting on a plan to phase out its bond purchases by the end of March, 2022. "The whole central bank community has been in dovish mode for a long time. If the data shift against us we may have to move quickly, and that can be disruptive."
Bullard was the first Fed official to speak publicly after the central bank's meeting this week, where policymakers said they expected the recovery to continue despite a jump in coronavirus infections.
While Fed Chair Jerome Powell said the job market recovery in particular was still "a ways off" from the point where a bond "taper" would be appropriate, Bullard said he saw labor markets healing fast, and questioned the logic of the Fed continuing to stoke the economy with its bond purchases amid fast economic growth and an "incipient housing bubble."
In theory Fed bond purchases hold down long-term interest rates, making it cheaper to finance homes and allowing buyers to pay more.
Bullard's argument represents one side of a debate at the central bank over how seriously to take inflation that has surprised with its pace and persistent, and how much berth to give the economy to reclaim the millions of jobs still missing from before the pandemic.
Market analysts expect a bond "taper" to start late this year or early in 2022, in part to prepare for an eventual rate increase.
In arguing for a sooner start to that process Bullard noted the current pace of inflation, at 3.5% annually by the Fed's preferred measure, is well above the central bank's 2% target, and adequate in his view to make up for past weak inflation as required by the central bank's new framework.
Bullard said the Fed is not currently well positioned to react if that level of inflation persists and requires higher interest rates in order to slow home, auto and other interest-rate sensitive purchases.
The Fed has said it wants to end its bond program before raising rates, and Bullard said the time was right to start that process so rates could be raised as needed.
"This is all about moving the supertanker and nudging the supertanker in the right direction at the right time," he said.
“This is a big inflationary impulse. We have to have the right risk management to contain this if we need to in 2022," Bullard said. If inflation eases on its own, as many policymakers expect, "we have a beautiful response. Just stay at near zero policy and push out the date of liftoff. The risk management to my mind is very clear."
(Reporting by Howard Schneider; Editing by Andrea Ricci)