March 20 (Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard said there is a risk of a “deflationary trap,” or a sustained period of declining prices, during a “sharp” global recession.

“Deflation is a real possibility in the current environment,” Bullard said today at a Banque de France conference in Paris, according to the text in slides released on the St. Louis Fed’s Web site.

Policy makers said March 18 the central bank will buy $300 billion in Treasury securities and increase its purchases of mortgage and agency debt in an effort to bolster housing and hasten the end of the recession. Their statement cautioned of “some risk that inflation could persist for a time below rates” considered optimal.

“A deflationary trap like Japan’s is a clear near-term risk,” Bullard said, referring to price declines that afflicted the Asian nation during the 1990s. “A global recession that continues longer than currently anticipated could create a deflationary psychology. If this becomes entrenched, we could face an extended period of declining prices.”

Bullard is among the most vocal of Fed policy makers in highlighting such a risk. By contrast, Atlanta Fed leader Dennis Lockhart said March 5, “I am not terribly concerned about deflation or inflation, for the moment.”

Fed Action

Fed Chairman Ben S. Bernanke is trying to prevent the credit contraction from deepening what already may be the worst recession in 60 years. Bernanke is becoming more aggressive after unemployment climbed to 8.1 percent, the highest level in 25 years, and economists forecast the economy will keep shrinking.

The consumer price index rose 0.4 percent in February, Labor Department figures showed March 18. Prices rose 0.2 percent from February 2008, up from no change in the prior 12- month period that was the weakest performance since 1955.

“We are in a sharp recession in the U.S. and globally,” Bullard said, with “global aspects unprecedented in the postwar era.” He added that financial turmoil is “continuing” and a global policy response is “critical.”

The jobless rate will reach 9.4 percent this year and remain above last month’s rate through at least 2011, threatening the nation’s longer-term growth potential, according to the median forecast of economists surveyed this month by Bloomberg News.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

Last Updated: March 20, 2009 11:45 EDT