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Bullard says Fed could ease further if US economy weakens

St. Louis Federal Reserve President James Bullard said the Fed is prepared to ease policy should the U.S. economy weaken, while keeping an eye on inflation risks.

"The Fed has potent tools at its disposal and is not now, or ever, out of ammunition," Bullard said today in a speech in San Diego, according to a release from the St. Louis Fed.

Fed Chairman Ben S. Bernanke said this week the U.S. is facing "a national crisis" with the jobless rate at or above 9 percent since April 2009. The economy lost momentum in August as consumer spending flagged and incomes unexpectedly dropped for the first time in almost two years, Commerce Department figures showed today.

Policy makers voted Sept. 21 to push down mortgage and other loan rates in an effort to spur growth and employment. The Fed plans to extend maturities of the Treasuries in its portfolio by buying $400 billion of long-term debt and selling an equal amount of shorter-term securities.

Stocks fell for two days last week as investors weren't persuaded the so-called Operation Twist, similar to an action in 1961, would help to lift growth.

"Outright asset purchases are a potent tool and must be employed carefully," Bullard said, citing the increase in inflation and inflation expectations in the past year. The central bank "still has to judge tradeoffs between inflation and support for the recovery.

Beyond levels

The St. Louis Fed leader said while the pace of economic recovery has been 'disappointing," most components of real gross domestic product, such as real consumption expenditures, have recovered to or beyond their levels in the fourth quarter of 2007. The exception has been investment related to housing, he said at a breakfast sponsored by Point Loma Nazarene University's Fermanian Business & Economic Institute.

Bullard urged Fed policy makers to adopt a more rules-based approach to monetary policy, with incremental adjustments based on the course of new economic data rather than announcements of big programs.

"The Committee in the past did not contemplate announcing several hundred basis point interest rate moves with a fixed end date," Bullard said. "Yet that is how the Committee behaves today."

Bullard opposed the Fed's pledge, made in August and maintained this month, to hold its benchmark interest rate near zero at least through the middle of 2013 so long as unemployment stays high and the inflation outlook is "subdued." The target rate has been in a range of zero to 0.25 percent since December 2008.

Stability needed

"A meeting-by-meeting balance sheet policy constitutes a rules-based policy because the Committee would make adjustments in response to economic events, just as in the interest rate targeting world," Bullard said. "Returning to a more rules- based approach may provide needed stability to the U.S. macroeconomy."

Economists have cut their forecasts for growth, according to a Bloomberg News survey taken from Sept. 2 to Sept. 7. The median forecast calls for a 1.8 percent annual pace of expansion in the third quarter, down from 2.1 percent in the previous month's survey. Growth next year is forecast to average 2.2 percent, down from 2.4 percent.

Stagnant payrolls in August have added to data over the past month showing the economy is faltering, including slowing manufacturing, plunging consumer confidence, falling home values and lower bond yields and stock prices.

Bullard, 50, doesn't vote on monetary policy this year. He joined the St. Louis Fed's research department in 1990 and became president of the regional bank in 2008.

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