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Federal Reserve Bank of St. Louis President James Bullard repeated his call for a quantitative rule to adjust the Fed’s program to buy $1.75 trillion in assets to account for changing economic conditions.

“There has been little indication of how or whether these amounts might be adjusted given incoming information on economic performance,” he said in a speech yesterday in St. Louis. “It is unclear whether the policy is ultimately consistent with a steady state with inflation at target and output at potential. Confusion is creating uncertainty in financial markets.”

Policy makers cut the benchmark interest rate almost to zero in December 2008 and turned to purchases of Treasury, housing agency and mortgage-backed securities as their main monetary tool. They are now debating when to begin withdrawing record liquidity from the financial system as the economy emerges from the worst recession since the Great Depression.

They said last month the economy has “picked up,” while maintaining their pledge to keep the benchmark interest rate exceptionally low for an “extended period.”

With the rate likely to stay near zero for “a while,” Bullard said, the “key issue is how to think about the asset- purchase program.”

Before December 2008, the central bank “was able to communicate future monetary policy because the path of interest- rate adjustment was relatively well understood,” Bullard said.

Now, with the rate near zero, “the Fed has lost this ability to communicate future policy,” he said in his speech to the annual meeting of the National Association for Business Economics.

Unemployment Outlook

Speaking to reporters after his speech, Bullard said the U.S. unemployment rate may top 10 percent as companies continue to cut jobs banks issue payday loans.

“Unemployment is leveling off, but we still may be headed toward double digits,” Bullard said. The rate was 9.8 percent in September, the highest since 1983.

“Labor markets are very weak,” Bullard said. “It is disturbing, and I find it upsetting that we are still losing jobs. We would like to see nonfarm payrolls turn positive before the end of the year. I don’t know if we will get there or not.”

Payrolls dropped by 263,000 in September, more than economists forecast. September’s losses brought total job reductions since the recession began in December 2007 to 7.2 million, the biggest decline since the Great Depression.

Bullard also said 2.5 percent to 3 percent is a “reasonable” estimate for the pace of growth in the second half of this year.

‘Not in Great Shape’

“It could be stronger in the first part of 2010,” he added. “We do have some things that are inhibiting growth. The financial panic has gone away, but firms themselves are still not in great shape and performing at peak levels.”

In his speech, Bullard also said economists shouldn’t put too much emphasis on the so-called output gap, or the difference between the economy’s actual and potential output, when assessing the potential for inflation.

“I am concerned about a popular narrative in use today — the narrative being that the output gap must be large since the recession is so severe,” he said. “And so, any medium-term inflation threat is negligible, even in the face of extraordinarily accommodative monetary policy. I think this narrative overplays the output-gap story.”

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