Fed should trim balance sheet, but keep rates low - Bullard

REUTERS - The U.S. central bank should begin allowing its massive portfolio to run off, even as it keeps its target policy rate low to maintain inflation and unemployment at current levels, St. Louis Federal Reserve Bank President James Bullard said on Friday.

"We should be allowing the balance sheet to normalize naturally now, during relatively good times, in case we are forced to resort to balance sheet policy in a future downturn," Bullard said in prepared slides for a talk in Memphis. Inflation is about at the Fed's 2-percent goal, and unemployment is also near the Fed's estimate of full employment, he said.

Keeping rates low can maintain those levels in the face of 2 percent economic growth, he said, and allowing the balance sheet to shrink from its current $4.5 trillion level can allow for a more "natural" adjustment of the yield curve, he said.

Meanwhile, the Fed can take a wait and see approach on fiscal policy, which could boost economic growth if it increases what has been very low productivity growth, Bullard said.

Bullard, who made a broadly similar presentation last month, is not a voter on Fed policy this year and his views are outside the mainstream of Fed thinking. He has stuck to his view that the Fed need not raise interest rates again until there is a "regime change" in the U.S. economy that meaningfully changes the trajectory of economic growth.

The Fed last week raised rates for the second time in three months.

(Reporting by Ann Saphir in San Francisco; Editing by Chizu Nomiyama)