Federal Reserve in better position to stop balance sheet reinvestment, Bullard says

The US central bank may now be in a better position to stop reinvesting the proceeds of its assets in acquiring new ones, a top member of the Federal Reserve said.

Furthermore, the Fed's policy rate could remain "relatively low" because the economy had converged on a "low-safe-real-interest-rate regime" which was unlikely to change dramatically in 2017, St.Louis Fed president James Bullard said.

In remarks prepared for a speech at the Economic Club in Memphis, he said: "Now that the policy rate has been increased, the FOMC may be in a better position to allow reinvestment to end or to otherwise reduce the size of the balance sheet."

Indeed, adjusting the balance sheet might offer a way of normalising policy without relying "exclusively" on interest rates, Bullard added.

Furthermore, he pointed out how current policy was distorting the yield curve, pressuring the short-end higher while weighing on other portions.

In his opinion, allowing the balance sheet to begin normalising now might also create 'policy space' which can be used in future should an economic downturn occur, requiring not just lower interest rates but also expanding the size of the balance sheet.

More than one interest rate hike in 2017 would be Okay

Separately, Reuters cited Bullard as saying he would be "okay" with another rate hike in 2017.

"One hike here or there is not the issue."

Room to wait and see how fiscal policy evolves

On fiscal policy, Bullard said they should not be considered as 'counter-cylical' because the US was not in a recession.

Secondly, the rate of growth in labour productivity growth was low and could benefit considerably.

"However, the Fed can wait to see how fiscal policy develops," he said.