St. Louis Federal Reserve Bank President James Bullard says allowing the Bush-era tax cuts to expire would be a mistake as the economic recovery tries to gain more traction.
The cuts, enacted by President George W. Bush in 2001 and 2003, will be revoked next year for all income brackets if Congress does nothing.
President Barack Obama wants Congress to keep the reductions in place only for those with income of less than $200,000 a year. Obama's proposal would boost the top tax rate to 39.6 percent next year from 35 percent currently.
"Increasing taxes while you're trying to get the economy to recover is not a good plan," he told CNBC.
Bullard also told CNBC that there is unanimity among officials on the central bank's policy-setting panel over providing more support to the economy if the recovery suffers a serious setback.
"I think everyone on the committee is completely on board with the idea that, you know, if things got really bad, we would try to take other action," he told CNBC.
"I call for a plan to have significant easing if the situation arises," Bullard said.
"I'm still an inflation hawk but … we're in a low side right now," he said, explaining that the consumer price index, excluding food and energy, has been coming down.
If the economy continues to recover in the second half, "this will all go away," but meanwhile there must be a plan B to deal with deflationary expectations, Bullard said.
Bullard, a voter on the Fed's policy-setting panel this year, said Thursday the risk of deflation in the United States has risen somewhat compared with the beginning of this year.
He said the most likely option in easing monetary policy is to buy more long-term Treasury securities, adding that there was room to influence medium- to long-term interest rates.
A subtle but significant shift appears to be occurring within the Fed over the course of monetary policy as the economic recovery is weakening, The New York Times reported.
Bullard’s warning came days after Fed Chairman Ben Bernanke said the central bank was prepared to do more to stimulate the economy if needed, though it had no immediate plans to do so.
With inflation very low, about half of the Fed’s implicit target of 2 percent, and with the European debt crisis having roiled the markets, even self-described inflation hawks like Bullard have gotten worried about the economy’s trajectory.
Bullard appeared to join other Fed officials already seen as sympathetic to the view that damage from long-term unemployment and the threat of deflation are the greatest challenges facing the economy. They include the Fed bank presidents Eric S. Rosengren of Boston and William C. Dudley of New York, the Times reported.
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