Federal Reserve Bank of St. Louis President James Bullard said the U.S. fiscal position is as weak as some euro-area countries’ and lawmakers must take “dramatic” measures to tackle it and restore confidence.
“The U.S. fiscal situation is similar to that of some countries in Europe and requires dramatic and sustained attention,” Bullard said in a speech in London today. “The political compromise in the U.S. has been to delay action until after the November election, but markets tend to pull the uncertainty forward.”
Bullard said that while the U.S. economy is growing, the pace is “sluggish” and the “most pressing” issue is the debt crisis in Europe. He said payrolls data last week hadn’t changed his outlook for a “modestly improving” performance in the second half of the year.
“Increased government spending today followed by higher future taxes is not likely to produce more rapid growth,” he said. “The most likely way forward continues to be a long period of debt paydown and sluggish growth, both in Europe and the U.S., and that the most pressing policy issue is to accept this path and prevent any additional problems from developing.”
Speaking at an event hosted by the Official Monetary and Financial Institutions Forum, Bullard said it will take time to see the potential impact of the Fed’s latest stimulus measures and that U.S. monetary policy is currently “appropriately calibrated.”
The Federal Open Market Committee said on June 20 it will expand its Operation Twist program to extend the maturities of assets on its balance sheet, and it stands ready to take further action as needed. The Fed also repeated that economic conditions will probably warrant keeping its benchmark interest rate near zero until at least late 2014. Bullard, who doesn’t vote on monetary policy this year, does participate in FOMC meetings.
“If things slow down a lot more and the U.S. economy looked like it was going back into recession or there were risks of deflation then we would consider more action,” Bullard told reporters. “But I don’t think we’re at that juncture.”
Operation Twist shouldn’t be expanded beyond the end of this year, as there is a limited amount of short-term Treasuries held by the Federal Reserve that can be extended, Bullard said. “We’re running out of balance sheet,” he said.
On the euro area, Bullard said that while the outlines of a “grand bargain” to resolve the debt crisis are “faintly visible,” there may not be “sufficient political support for a ceding of sovereign authority to the European level.”
He said that the perceived lack of a euro-exit mechanism means some countries don’t have enough motivation to keep up austerity programs. This may change the “incentives” for other nations to stay in the currency zone as it increases the efforts they need to make to keep the bloc together.
“The common refrain that no country can ever be allowed to leave the EMU is altering the incentives for nations to take the actions necessary to maintain membership,” he said. “For countries that are already members, taking on country credit risk through mutualization is also damaging their incentives to remain in the club. They enjoy the benefits of membership, but the calculus could change if they see too many disadvantages from the policies undertaken to keep the union together.”
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