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(Story corrects paragraph 11 to "earlier this year" instead of "last year")
By Howard Schneider
ST. LOUIS (Reuters) - A December rate increase is now the "base case" for the U.S. Federal Reserve but any move beyond that is likely to come at an "imperceptible" pace, St. Louis Fed President James Bullard said in an interview on Thursday.
Forecasts released after the Fed's policy meeting last week showed 14 of 17 Fed policymakers expecting a rate increase before the end of the year, a group that includes Bullard, currently a voting member of the Fed's rate-setting committee.
Though all Fed meetings are now theoretically "live" for a rate increase, Bullard said that as a practical matter the November session was unlikely because it will not be followed by a news conference by Fed Chair Janet Yellen.
"A lot of members want to increase the policy rate by the end of the year. That would indicate that is a base case at this point," Bullard said in an interview with Reuters during a community banking conference here. "Practically speaking what has happened is there are no press conferences at certain meetings and because of that we have tended to not want to move at those meetings... If you think we should move at a meeting with a press conference that leaves only one."
The more interesting issue may be what happens next, a question that highlights the current divide at the Fed. Some feel the U.S. and global economies have downshifted into a semi-permanent rut, while others feel it is only a matter of time before "headwinds" from the financial crisis diminish for good, and things like inflation return to normal.
Bullard, considered a "hawk" in his initial years at the Fed, is now firmly in the things-are-different camp - so much so that he feels the Fed should raise interest rates just once more, then stand pat until there is evidence of an underlying change in productivity, growth or inflation.
That would leave the federal funds rate in a range between 0.5 and 0.75 percent, far short of the 2.9 percent rate that the median estimate of his colleagues sets as appropriate in the long run. Historical averages that are above even that.
While some policymakers have argued with urgency that rates need to rise now, Bullard said that even such officials agree the path forward will be gradual.
If the last two years are a guide, that is probably an understatement. The Fed through much of 2015 indicated it was readying to raise rates, but did so only in December. It then started 2016 expecting four quarter-point rate hikes that have now winnowed down to what will likely be only one.
"If you are only moving once a year, that is not interest rate normalization. That is not anything in the world of macroeconomics. That is so slow as to be imperceptible," said Bullard. Such a drawn-out process, he said, is likely to be interrupted by some unexpected event - whether a productivity boom, a recession, or otherwise - that would force policymakers to change course.
That line of thinking led him earlier this year to adopt a "regime-based" view of policy that essentially treats current levels of growth, inflation and interest rates as likely to persist. He feels a single quarter-point increase would put rates at a level consistent for that existing state of affairs.
In a wide-ranging conversation, he said the slow pace of normalization had other implications, including pushing out the date when the Fed may reduce the size of the more than $4 trillion balance sheet it accumulated during three rounds of quantitative easing.
Bullard said there may now be arguments for simply keeping the balance sheet at its current level. Such a step might make sense for the conduct of monetary policy going forward but could prove controversial among lawmakers worried about the Fed's post-crisis size and influence.
"We will have a big balance sheet for a while," Bullard said. "There are good questions as to whether that is such a bad thing or not."
Reporting by Howard Schneider; Editing by Chizu Nomiyama