UPDATE: Fed Bullard Repeats: Be Cautious in U.S. Rate Hikes

--Adds Comments, Background on BOJ Policy at Bottom; Fixes Typo in 1st Paragraph

     TOKYO (MNI) - St. Louis Federal Reserve Bank President James Bullard

Thursday repeated his view that the Federal Reserve Board must be cautious in

raising interest rates, even though data indicate the U.S. economy is "in good

shape" at this point.

     He cited three reasons to be cautious: inflation expectations are low, the

Fed policy rate appears to be neutral and the U.S. nominal yield curve could

invert later this year or early next year, which would be a bearish signal for

the U.S. economy.

     It is hard to expect bond yields to rise much more without seeing much

higher inflation expectations, he told a group of market participants at an

MNI-Market News seminar.

     The Fed has substantially "normalized" its monetary easing policy, he said.

     Earlier this week, Bullard told a conference in Tokyo that the Fed's

current target range of 1.5% to 1.75% was "already pushing against the upper

bound of the neutral level today."

     Bullard, who does not vote on rates this year, also said the U.S. could

allow more immigration to help support labor force growth, which has slowed in

recent years.

     "Strategic immigration practiced by Canada and Australia appears to be a

very logical policy to me," he said.

     Asked about the prospects for the Bank of Japan's hitting its elusive 2%

inflation target, Bullard replied that given low unemployment and the modest but

sustained economic recovery in Japan, the BOJ "might be able" to guide inflation

close to target "over time."

     He also said he has learned that a structural factor is hampering the BOJ's

effort: some Japanese people do not wish to see inflation after seeing prices

fall for long.

     BOJ Governor Haruhiko Kuroda said Wednesday that central banks in advanced

economies must analyze the mechanism behind the slow response of prices and

wages to economic expansion.

     Despite improvements in the real economy in the past decade, prices and

wages have remained sluggish, a phenomenon labeled as the 'missing inflation' or

'missing wage inflation' puzzle, Kuroda told an international conference hosted

by the BOJ.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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