–‘On Pause’ Until Stronger Data; Don’t Go to ‘Super-Extended Period’
–Doesn’t Rule Out QE3 But Expects Stronger Economy
–Monetary Policy to Stay ‘Very Stimulative’ Despite End of QE2

By Steven K. Beckner

ST. LOUIS (MNI) – St. Louis Federal Reserve Bank President James
Bullard warned Thursday against continuing to lengthen the “extended
period” of an “exceptionally low” federal funds rate and against keeping
the Fed’s balance sheet enlarged indefinitely.

However, he also suggested he and the Fed’s policymaking Federal
Open Market Committee are in no hurry to tighten monetary policy and did
not rule out additional easing.

For the foreseeable future, he said the FOMC will be “on pause”
waiting for stronger economic data before changing policy. While in this
pause, the Fed will maintain a “very stimulative” stance despite the end
of the second round of quantitative easing on the day in which he was
speaking.

He said he expects the economy to strengthen, but should further
easing be required, an even longer “extended period” would not be “a
viable option.”

Bullard’s comments, which came at a press conference on the
sidelines of a St. Louis conference on quantitative easing, come in wake
of the FOMC’s decision last week to reaffirm its “extended period”
committment and after Fed Chairman Ben Bernanke seemed to imply a longer
“extended period” at his post-FOMC press conference.

As reported earlier, Bullard told the conference that continuing to
pledge “an extended period” of near zero rates “could be
counterproductive.” He also warned that the longer the Fed waits to
remove the money it has pumped into the economy the last few years the
more it risks an upsurge in inflation.

Asked to elaborate on inflation risks by MNI, Bullard said “a big
balance sheet could turn into a lot of inflation if we don’t play our
cards right going forward.”

“The committee is very sensitive to that,” he continued. “That does
pose a risk.”

Bullard said announcing an intention to keep rates near zero “for
an extended period” works “in theory,” but “as a practical matter, how
can we make promises out there further and further into the future.”

“Markets won’t believe us,” he said, adding that “the effect of
that kind of announcement is very questionable,” he said, adding that
“from that perspective quantitative easing is a more effective policy”
than making the “extended period” longer if more stimulus is needed.

“I just don’t think it’s a viable option to say we’re going to go
to super-extended period,” he added.

But Bullard made clear he is not inclined to move in either
direction for the time being. Rather, he said, as far as he is
concerned, the FOMC is in a wait-and-see posture.

“For me we’ve gone on pause” and “have to gather more information
on the economy,” he said.

“I think the economy will strengthen,” he said, but he and his
colleagues are “going to have to get some data to show that the economy
has strengthened, he continued. “One meeting is not enough at the august
meeting to definitively decide one way or another. That’s the nature of
being on pause.”

Bullard said the economy has been growing more slowly because of
temporary factors, including the Greek debt crisis, that are starting to
ease, but it also faces lingering effects of the severe financial
crisis that will take longer to get over.

“Deleveraging takes a long time,” he said.

Further defining what it means to be “on pause,” he said “the
balance sheet will stay the same size. We’re not taking any stimulus
away. We’re leaving that in place.”

“We’ve still got a very stimulative policy,” Bullard went on. “Just
because we’re not buying, we’re not selling and we’re not allowing any
run-off while we collect more data …”

Asked about the possibility of a third round of quantitative
easing, Bullard did not rule it out but like his colleagues suggested
there is a high bar for “QE3.”

“Definitely policy should be state-contingent as I’ve always said,”
he said. “If the economy is not performing well the committee should
definitely consider additional action.”

However, he was quick to add that “the situation is different” from
last year when the FOMC decided to launch QE2.

“Inflation has picked up fairly substantially,” he said. “We’re
just facing a different constellation than last summer.”

Bullard said jobless claims “have been a little disappointing” and
“the labor market remains a little weaker than we would have anticipated
at this point.”

But he said “big firms are profitable, they’re pretty lean, they
have already made a lot of cuts and they have got a lot of cash.” He
called that “a recipe for hiring” and predicted “we will see hiring as
we go through this year.”

It will be “helpful as we get part way through this Greek episode
which was weighing on financial markets,” he said, and it would also be
helpful for the White House and Congress to reach a long-term deficit
reduction deal.

** Market News International Washington Bureau: 202-371-2121 **

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