St. Louis Federal Reserve Bank President James Bullard said he is troubled by a drop in inflation expectations but does not see deflation as likely and still sees a high bar to further quantitative easing, The Wall Street Journal reported.
"That is making me a little bit worried," Bullard told The Wall Street Journal, referring to recent declines in market-based measures of inflation expectations.
Bullard said that if economic activity continued to weaken or if the economy were to be hit by another shock, then inflation expectations could decline substantially below the Fed's objectives, raising the risk of deflation.
Fed Chairman Ben Bernanke said on Wednesday the central bank would have to ease policy further if inflation or inflation expectation fell too low.
"That would be something we have to respond to because we do not want deflation," he said.
The gap between yields on 10-year Treasury notes and their inflation-protected counterparts fell to 1.70 percent last week, the lowest since September 2010, although it has edged up since then.
Last week, the Fed, which aims to keep inflation close to 2 percent, warned the U.S. economy faced "significant" downside risks and it launched a new program to shift assets on its balance sheet to try to drive long-term borrowing costs lower.
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