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Fed's Bullard says FOMC to act if economy sags: report

TOKYO (Reuters) - The Federal Reserve will take action if the economy weakens substantially and deflation reappears, a senior Fed official said in an interview with Japan's Nikkei business daily published on Tuesday.

St. Louis Fed President James Bullard said he would support action if that occurred.

"If the economy weakens substantially, and especially if the inflation picture starts to deteriorate so that deflation becomes a risk again, then I think the committee would definitely take action," Bullard told the Nikkei.

Bullard also said the Fed has already implemented a very easy monetary policy and the inflation risk has increased in the United States.

Bullard, who is regarded as hawkish, said he expects stronger growth in the second half of 2011 and going into 2012.

"I would still think that the baseline would be for two and a half percent real growth in the U.S. over the second half of 2011," he said.

The head of the St. Louis branch does not have a vote on the policy-setting FOMC this year.

With the global economy sputtering and volatility in financial markets, the U.S. central bank is being looked to by markets for reassurance.

The markets are awaiting a speech by Fed Chairman Ben Bernanke on Friday in Jackson Hole, Wyoming, at an annual gathering of policymakers and academics.

Recent market turmoil and signs of weaker U.S. growth have boosted expectations Bernanke may hint at more emergency stimulus for the economy.

At last year's meeting, Bernanke hinted at what eventually became a $600 billion quantitative easing bond-buying program, known as QE2. But some economists said Bernanke may hold off on aggressive easing plans this year.

(Reporting by Kaori Kaneko; Editing by Michael Watson)

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