Fed's Bullard cites 'worrisome' drop in inflation expectations

MEMPHIS (Reuters) - The continued rout in global oil markets may have caused a "worrisome" drop in U.S. inflation expectations that will make it harder for the Federal Reserve to reach one of its key policy targets, St. Louis Fed President James Bullard said on Thursday.

Since the dramatic fall in oil began in 2014 Fed officials have insisted the impact on U.S. price levels would be temporary, bottoming out at some point and allowing inflation to rise to the Fed's 2 percent target.

Bullard said that in general he still feels that is the case, with low oil prices an overall "bullish factor for the U.S." that is supporting consumer spending and record levels of auto sales.

But he said both market-based and long-term measures of inflation expectations have been declining, and their continued fall "is becoming worrisome."

Household and business expectations about inflation are considered a key component determining actual price increases, and, if they become unmoored to the downside, could pull the rate of inflation lower in a way that is difficult to change.

"Low inflation expectations may keep actual inflation lower, all else equal, making it more difficult for the Fed to return inflation to target," Bullard said.

Bullard is a voter on the Fed's rate-setting committee this year and his comments reflect the Fed's central focus on whether global economic conditions may foil efforts to lift U.S. inflation. The Fed's preferred measure of inflation is currently running at less than one percent, far below target.

The Fed proceeded with its first rate hike in a decade last month, but said the subsequent increases would depend on firmer evidence that inflation was climbing back towards its target level.

Bullard was among the policymakers arguing for an earlier rate hike partly on the grounds that he expected inflation to rebound. But in recent remarks, including those on Thursday to the Economic Club of Memphis, he has expressed more skepticism.

"Once oil prices stabilize, headline inflation should return to the Federal Open Market Committee's inflation target of 2 percent, although it may take longer than previously thought," he said.

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