Bloomberg News

Bullard Says Fed Could Ease Further If U.S. Economy Weakens

September 30, 2011

(Updates with comment on policy in seventh paragraph.)

Sept. 30 (Bloomberg) -- 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. “Should further weakness develop, monetary policy will need to respond appropriately,” he said, adding that “sluggish growth” leaves the economy vulnerable to “shocks.”

Fed Chairman Ben S. Bernanke said this week the U.S. is facing “a national crisis” with the jobless rate at around 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 that so-called Operation Twist, similar to an action in 1961, would help to lift economic growth.

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

Not Much Aid

Bullard told reporters after the speech that he supports Operation Twist, though he believes it won’t do much to aid the economy. He doesn’t hold a vote on the Federal Open Market Committee this year.

“I would have supported that,” he said. “I thought the impact of the program would be marginal, but there was some analysis presented that suggested there might be an impact from the program.”

The St. Louis Fed leader said the odds of another recession have “moved up, but they are not especially high.” He wants to give the Fed’s measures during the past two months time to work before considering a new program of asset purchases, he said.

“We have just made two moves” to support growth, he said. “We need to gauge the impact of those moves before we embark on a further program.”

Dallas Fed President Richard Fisher said today he doesn’t believe the U.S. will relapse into a recession, but “we’re on an edge here.”

‘Pushing’ on a String

“We don’t need more monetary stimulus, we need a more efficient fiscal mechanism,” Fisher said in an interview on Fox Business Network. The central bank will “be pushing on a string if we continue to move down this path.”

Bullard said while the pace of economic recovery has been ‘disappointing,’’ most components of real gross domestic product, such as real consumption expenditures, are now equal or above the levels in the fourth quarter of 2007. The exception is investment related to housing, he said at a breakfast sponsored by Point Loma Nazarene University’s Fermanian Business and 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.”

Against Fed Pledge

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.

“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.”

Bullard disagreed with the view expressed by Chicago Fed President Charles Evans that the Fed should set “markers” for unemployment and inflation that would need to be reached before the Fed raises rates.

‘A Little Leery’

“You could pull monetary policy off course for a long period of time” with policy linked to the unemployment level and U.S. unemployment potentially at a higher level similar to the jobless rate in Europe, Bullard said. “I am a little leery about tying monetary policy directly to unemployment,” he said.

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.

The Standard & Poor’s 500 Index of stocks fell 1 percent to 1,144.04 at 2:15 p.m. in New York trading. Yields on 10-year Treasury notes fell six basis points, or 0.06 percentage point, to 1.94 percent.

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.

--Editors: James L Tyson, Gail DeGeorge

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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