Federal Reserve Bank of St. Louis President James Bullard said purchases of sovereign debt by the European Central Bank would amount to fiscal policy that is better conducted by democratically elected governments.
“This is ‘fiscalization’ of monetary policy: Asking the central bank to take actions far outside the remit of monetary policy,” Bullard said today in a speech to a conference of economists in San Diego. “Assistance like this from a central authority to a region is best brokered through the political process in democratically elected bodies.”
The ECB unveiled its Outright Monetary Transactions bond- buying plan, known as the OMT, in September, pledging to spend as much money as needed to restore confidence in the region’s bond markets. The program provides support to debt-strapped nations as long as they agree to economic reforms as part of a bailout from Europe’s rescue fund.
Bullard, speaking as part of a National Association for Business Economics panel, said that is the equivalent of the Fed buying debt of individual states.
“Standard monetary policy has become wrapped up in the fiscal policy package and subject to the negotiations that surround that package,” he said in prepared remarks. “This defeats one of the original purposes of central bank independence: Having a monetary authority that can react to macroeconomic shocks quickly and effectively.”
Bullard instead called for “a fiscal stabilization authority” that could make independent decisions “in speedy reaction to macroeconomic events.”
The St. Louis Fed official didn’t discuss the outlook for monetary policy in his prepared remarks.
Earlier in a CNBC interview, Bullard said an end to the Fed’s asset purchase program should be in response to economic data. If unemployment falls near 7 percent, that could prompt an end to the program, he said. “Why are we talking about dates?” Bullard said.
The Fed last month said it will buy $45 billion a month of Treasury securities starting in January, expanding its asset- purchase program to $85 billion monthly, and for the first time linked the outlook for its main interest rate to unemployment and inflation. The central bank may end bond purchases sometime in 2013, some policy makers said, according to minutes of the meeting released yesterday.
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