St. Louis Federal Reserve President James Bullard said the Fed may start to rely less on the interest rate target, and more on increasing liquidity to solve the country's economic woes.
Still, he said, further rate easing is possible in light of the dismal economic data coming out of the United States.
Markets are currently fully priced in for a 50 basis point cut at the Fed's meeting in December, at 31% priced in for a steeper 75 basis point cut.
Speaking in Indiana Thursday night, Bullard said deflation has now become a cause for concern, and could exacerbate the housing crisis. He said deflation could be avoided if the Fed announces money supply targets.
Earlier this week, it was revealed headline U.S. inflation fell by 1.0% in October, the steepest fall on record.
Bullard said output in the U.S. might "fall sharply" in the fourth quarter, and the U.S. consumer is "very pessimistic," with falling domestic demand set to drag on the U.S. economy.
Nevertheless, the most crucial market uncertainties have been addressed, Bullard said. He said the Troubled Asset Relief Program's injections of liquidity into U.S. banks has helped stabilize the crisis.
By Megan Ainscow
©CEP News Ltd. 2008