The United States has escaped the danger of a Japanese-style deflationary trap, but it is not yet time to start tightening policy, St. Louis Federal Reserve Bank President James Bullard told the Financial Times.

Bullard said in an interview published on Monday that his preoccupation throughout 2009 had been deflation, but the risk had passed.

At a Fed meeting last week, Thomas Hoenig, president of the Kansas City Fed and a rate hawk, argued financial conditions no longer warranted keeping rates exceptionally low for a prolonged period.

But other members of the Federal Open Market Committee voted to preserve the extended period phrase, generally taken to mean near-zero interest rates will continue for at least six months.

Bullard said he was happy to continue with the current guidance, but he did have some sympathy for Hoenig's argument that if you come off zero and you move up a little bit, it's still a very easy policy. You've still got a very large balance sheet and you're still at very low interest rates.

He added that, although it was not time to tighten policy, the FOMC would weigh factors other than inflation and unemployment. Factors to consider would include asset bubbles.

I think they're gaining weight with many people because of the bad experience we had in the aftermath of the last recession, the housing bubble and how that really has blown up...

When the Fed does start to raise rates it may have to switch from its traditional benchmark of targeting the federal funds rate to targeting a repurchase rate.

Bullard said the Fed could consider using interest it paid on reserves as the main rate, but it might prefer a market measure such as the repo rate.

One move that could be made before a change in the main interest rate is an increase in the discount rate at which it lends to banks, which was kept unusually low as part of the central bank's measures to shore up the financial system.

Bullard emphasized that an end to the unusually low spread of 25 basis points between the discount rate and the interest rate paid on reserves held at the Fed should not be seen as an immediate precursor to a general tightening of monetary policy.

It makes sense today to think about it in terms of a liquidity context. The reason it's so low is exactly because we're trying to address a huge crisis and a very special situation.

The broader, post-crisis economy was on track with its recovery, he said.

It's not a real strong recovery but that's what we had predicted anyway. But it will be above-average growth for the first half of 2010 and we'll probably see some positive jobs growth in the first part of 2010 here.

He hoped that improvement in the labor market would come in the first quarter.

Economists polled by Reuters are looking for a slim gain in U.S. January employment numbers due on Friday, though probably not enough to put a dent in the 10 percent jobless rate.

Data last Friday showed the U.S. economy grew at its fastest pace in more than six years in the fourth quarter, surprising economists.

Inflation