* Fed’s Bullard says market reaction “disconcerting”
* Questions sustainability of yield differentials
* Expects balance sheet trims over at least 5 years
* Announcement on adjustments likely in September (Updates throughout)
By John Geddie and Ritvik Carvalho
LONDON, June 29 (Reuters) - The U.S. Federal Reserve needs solid data to maintain a monetary policy that diverges from the world’s other major developed economies, St. Louis Federal Reserve chief James Bullard said on Thursday.
Speaking to reporters on the sidelines of an event in London, Bullard added that it was “disconcerting” that market measures of inflation in the world’s largest economy had fallen despite the central bank raising interest rates twice so far this year.
“The U.S. is kind of trying to go it alone... which we can do and we certainly have done historically,” Bullard earlier told an event hosted by the Official Monetary and Financial Institutions Forum (OMFIF).
“But if you want to go it alone in this environment you have to really have data that’s coming in strong behind you and justifying what you want to do.”
Bullard, who does not currently vote in the U.S. Federal Reserve’s rate-setting committee and is more dovish than many of his peers, questioned how long the Fed could continue on its tightening path while other central banks were still keeping policy easy.
“You can go independently - I just think it’s hard in this environment with low rates around the world, negative rates in Europe and Japan... how realistic is it for the U.S. to have a (bond) yield curve that is dramatically above our foreign rivals?”
Bullard said such differentials in yields -- an indication of where a country can borrow cash on financial markets -- may lead to major moves in the value of the dollar relative to other currencies.
The Fed’s last policy statement flagged concern over a recent fall in the Fed’s preferred measure of inflation to 1.5 percent.
Fed officials have since then split between those worried the trend may persist and those who feel the Fed needs to tighten still-loose monetary policy as a precaution.
Bullard said he was concerned investors appeared to doubt the Fed’s ability to generate price growth.
”Market-based measures of inflation expectations... have come down since March and normally you would think if the Fed was tightening into good data then the inflation expectations would stay constant.
“That’s a bit disconcerting for the normalization strategy.”
Rather than hiking rates further, Bullard said the Fed’s “natural next step” should be to trim its balance sheet -- a process that could take at least five years.
He added the Fed was likely to announce plans for balance sheet adjustments at its policy meeting in September, skipping its July meeting where it is not scheduled to hold a press conference.
OMFIF is an independent think tank for central banking, economic policy and public investment. (Reporting by Ritvik Carvalho; editing by John Stonestreet)