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Fed's Bullard: beware basing policy off optimistic forecasts

The Federal Reserve Bank of St. Louis' President and CEO James Bullard speaks during the "Hyman P. Minsky Conference on the State of the U.S
The Federal Reserve Bank of St. Louis' President and CEO James Bullard speaks during the "Hyman P. Minsky Conference on the State of the U.S

JACKSON HOLE, Wyoming (Reuters) - The substantial rise in bond yields since last month is not justified by an improvement in U.S. economic data or a rise in inflation, a senior Federal Reserve official said on Friday, warning it reflects optimism that may prove to be too rosy.

"Recent FOMC (Federal Open Market Committee) decisions have met with a substantial rise in Treasury yields, and I have suggested that a possible justification for the rise in yields is increased optimism concerning future U.S. macroeconomic performance," said St. Louis Federal Reserve President James Bullard in prepared remarks.

"However, given recent forecasting performance, we should be careful in using an optimistic forecast to justify current policy decisions. A more prudent approach would be to wait to see if better macroeconomic outcomes materialize in the months and quarters ahead," he told a monetary policy conference here.

Bullard voted against the Fed's decision after a meeting of the FOMC on June 18-19 to deputize Chairman Ben Bernanke to explain during a post-meeting press conference that the policy-setting committee expects to begin scaling back bond buying later this year, if the economy grows as expected.

Yields on the benchmark 10-year U.S. Treasury note have risen by almost a full percentage point since then, to around 2.60 percent, even though the Fed decided in the meeting to keep buying bonds at an $85 billion monthly pace.

Bullard, who also dissented in June because he was concerned that inflation had fallen further beneath the Fed's 2 percent target, emphasized the sizeable nature of the market move "even though the Committee has not actually changed any policy settings at this point."

(Reporting by Jonathan Spicer, writing by Alister Bull; Editing by Chizu Nomiyama)

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