STOCKHOLM (Reuters) - San Francisco Federal Reserve Bank President John Williams reiterated his view on Monday that an improving U.S. economy would allow the Federal Reserve to pare back its stimulatory bond buying, but low inflation needed to be closely watched.
Williams said he largely stuck by his view, expressed in a speech in April, that the Fed's bond buying program could slow in the summer and end by the end of the year.
Fed chief Ben Bernanke spooked financial markets last month when he said the central bank could trim its bond purchases as soon as at one of its next few meetings.
The Fed is buying $85 billion in Treasuries and mortgage-backed securities each month to reduce long-term interest rates and encourage hiring. It has vowed to continue the program until there is substantial improvement in the labor market outlook.
"It really is a question for me of watching for continuing signs in the U.S. labor market, continuing signs of more greater confidence in the momentum in the U.S. economy, but also watching carefully where the underlying inflation rate is and what the outlook for inflation is," Williams told reporters during a visit to Sweden.
He noted that underlying inflation was at 1 percent, below the Fed's target of 2 percent. Speaking on the sidelines of a seminar in the Swedish capital, he said he saw temporary factors as being the main reason inflation was being held low and expected the inflation rate to return to 2 percent.
Still, it was one of the factors the Fed should watch when deciding on policy, he said.
"If we see continued low inflation and, more worrisome, a fall in long-term inflation expectations, well below 2 percent, then those would be factors that argue for, all else equal, greater total purchases for our program than otherwise," he said.
(Reporting by Johan Sennero and Patrick Lannin; Editing by Patrick Lannin and Susan Fenton)