Bloomberg News

Fed’s Bullard Says Inflation, Clogged Housing Argue Against QE

February 24, 2012

Feb. 24 (Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard said he doesn’t favor additional asset purchases since inflation is above the central bank’s target and the transmission mechanism for monetary policy is clogged by the damaged housing market.

“I am worried that if you try to push so hard on monetary policy even when the mechanism isn’t really working the whole thing blows up on you,” Bullard told reporters after a speech today in New York.

Bullard spoke following the presentation of a paper by economists Michael Feroli of JPMorgan Chase & Co. and Ethan Harris of Bank of America Corp. that argued the collapse of housing and upheaval in the mortgage market was preventing the central bank’s low interest rate policies from being as effective as in normal recoveries.

Bullard said that the Federal Open Market Committee would need to mark down its economic forecasts before a third round of quantitative easing would be warranted.

“If we get a lot of bad data coming in, I’m sure that’s what would happen,” Bullard said. If the outlook for the economy worsened, “then it would be reasonable” to put QE3 “back on the table.”

“Inflation numbers would have to indicate further disinflation or the threat of deflation,” Bullard said at the U.S. Monetary Policy Forum hosted by the University of Chicago Booth School of Business. “Inflation risks are to the upside” currently.

Prefers Treasuries

Bullard said if the Fed undertakes another round of bond buying, he’d prefer the U.S. central bank stick to buying Treasuries, instead of mortgage debt, because the Fed aims to get back to a Treasuries-only portfolio.

“Labor markets are looking better in the U.S.,” and “probability of a severe financial meltdown” in Europe is less, he said. “Those are all reasons to be more optimistic.”

--Editors: Gail DeGeorge, Christopher Wellisz

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

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


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