–US Econ Likely To Improve In 2nd Half Of This Year, Into 2012
–FOMC Must Watch Situation Closely, Remove Accommodation At Approp Pace

By Brai Odion-Esene

WASHINGTON (MNI) – St. Louis Federal Reserve President James
Bullard Friday described the current highly accommodative stance of
monetary policy as appropriate given present conditions in the economy,
but warned that as the recovery speeds up next year, the central bank
must trim its balance sheet to guard against causing higher inflation.

In remarks prepared for the 3rd Annual Mountain Economic Summit in
Jackson Hole, Wyoming, Bullard echoed many of the comments he made
earlier during an interview on CNBC. He said the U.S. economic
performance is likely to improve in the second half of 2011 “as key
uncertainties unwind,” while also warning that the Fed cannot remedy a
failure to raise the debt ceiling.

Given indications that the U.S. economy expanded at a
slower-than-expected pace in the first half of the year, Bullard said
monetary policy is on hold in an “ultra-easy mode,” which is “an
appropriate setting for monetary policy today.”

However, given his expectation that the economy will improve in the
next six months and into 2012, Bullard said the Fed’s policymaking
Federal Open Market Committee “will have to monitor the situation
closely in order to remove accommodation at an appropriate pace.”

He warned that the Fed’s large balance sheet could generate
“significant inflation” if accommodation is not removed at an
appropriate pace. “The inflationary threat has driven inflation
expectations higher over the last year, and actual inflation has
followed,” Bullard said.

“With the policy rate at zero, this means real short-term rates
have declined. That is, the policy stance has become even easier over
the last year,” he added.

Commenting on the ongoing U.S. debt crisis, Bullard argued that
the U.S. fiscal situation is the one remaining uncertainty — with
concerns over Japan, high oil prices and EU sovereign debt largely
resolved — that is plaguing the U.S. economy.

“Once this last uncertainty is resolved, the path to faster growth
may be open,” he said.

Bullard made it clear the notion that the Fed can step in if
necessary is incorrect. “The Fed has no options should the debt ceiling
not be raised.”

Only should a general crisis ensure could the Fed act to provide
liquidity to markets as it did in 2008 and 2009, he added.

That is why it is essential that Congress and the White House reach
an agreement on deficit reduction as well as raising the debt ceiling,
Bullard said, noting the prized U.S. ‘AAA’ rating is in peril.

“There is a substantial opportunity to put the U.S. fiscal
situation on firmer footing, and remove a cloud of uncertainty hanging
over U.S. macroeconomic prospects,” Bullard said.

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

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