–Retransmitting Story Published 15:39 ET, Fixing Typo
–Should Not Pre-Judge Possibility for 3rd Round of Quantitative Easing
By Claudia Hirsch
NEW YORK (MNI) – St. Louis Federal Reserve Board President James
Bullard Monday said the risk of U.S. deflation persists, but the
question of an additional, third tranche of monetary stimulus should not
be pre-judged.
“The jury’s still out on that,” Bullard said of deflation,
answering reporters’ questions following a presentation on the Fed’s
latest round of quantitative easing to the New York Society of
Securities Analysts.
It is “encouraging” that inflation expectations have recently moved
up, he said, but noted that “that slowdown during the summer was a
surprise.”
He also described the latest U.S. employment report, which showed
stronger-than-expected private job creation in October and upward
revisions to two previous reports, as a “surprise on the upside,” and
“very encouraging,” but warned that “it’s only one month’s report.” He
noted that a pair of promising employment reports this past spring
did not presage a steady recovery.
“Instead we had the European sovereign debt crisis and a string of
weak (U.S.) data,” Bullard said.
Asked if he would be comfortable adding to the Fed’s latest round
of quantitative easing, the St. Louis Fed chief said, “Why should we
pre-judge it at this point?”
At last Wednesday’s policy meeting, the Fed pledged as much as $600
billion in Treasury purchases, at a monthly clip of $75 billion, by the
end of the second quarter of next year. Bullard had been unable to
convince all his FOMC colleagues to design the latest stimulus on a
purely meeting-by-meeting basis.
Turning to the central bank’s future exit strategy from its massive
liquidity injections of the past two years, Bullard said the Fed will
not have to “wait for actual inflation” to arrive before unwinding its
special securities purchases. He told reporters and, earlier, his
audience, that a forecast of inflation to come could hold sway.
“We look at everything,” he said, “to see how it’s feeding back to
inflation.”
Bullard’s own preference for inflation-spotting is not via the
survey measures, like the consumer price index, but rather via
Treasury’s Inflation-Protected Securities.
“There are a lot of tricky issues there, but I think generally
speaking they give us a better signal and a more market-sensitive signal
about what’s going on.”
Bullard pressed the case for immediate attention to fixing
America’s long-term fiscal deterioration.
“It is worrisome, because it appears there’s not a lot of political
will,” to reduce the U.S. deficit and debt levels, the FOMC voting
member told reporters.
He pointed to the European situation as a “textbook” case of how a
nation can “borrow too much” and how financial markets can “lose faith”
that those debts will be repaid. He said it will take a couple of years
for Europe’s troubled economies to “follow through” fully on their
fiscal retrenchment programs.
Back in the U.S., he said Fed officials’ rather public debate on
the efficacy of quantitative easing is healthy, given how controversial
the non-traditional rescue plans have been.
“These are tumultuous times for monetary policy,” Bullard said.
“It’s good to have open and public debate.”
He also gave a pass to German Finance Minister Wolfgang Schaeuble,
who over the weekend sharply criticized the Fed’s latest monetary
stimulus move.
“I don’t begrudge the finance minister from expressing his
opinions,” Bullard said. “We have pretty thick skin.”
Asked how QE2 might spur lending to small- and medium-sized U.S.
businesses, he said an eventual pickup in the economy would prompt a
“virtuous cycle” of greater loan demand and better opportunities for
lenders.
“We’d certainly like to feel like credit markets are functioning
better than they are right now,” he said, and added that banks in his
Fed district report “very weak loan demand.”
Bullard also said the current scandals surrounding foreclosures and
some banks’ lack of proper documentation will not alter the
“macroeconomics” of the mortgage mess.
“Some people are not paying their mortgages, and eventually they
are going to be foreclosed on, one way or another.”
Bullard’s remarks to the NYSSA followed an exclusive interview with
Market News International published Monday, in which he emphasized that
the Fed could adjust up or down the actual amount of monetary stimulus
it injects into the financial system by mid-2011, by re-assessing
economic conditions at each policy-making meeting.
Bullard told MNI that the new asset purchase program, intended to
reduce long-term interest rates, will be “open-ended” as well as “state
contingent.”
In the interview, Bullard also said that even without the housing
component’s downward trajectory, the data show the disinflation
trend does exist, one that “hopefully we can arrest with our policy.”
** Market News International New York Newsroom: 212-669-6430 **
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