Bullard Favors More Treasury Purchases Should Inflation Fall
St. Louis Fed. President James Bullard
James Bullard, president of the Federal Reserve Bank of St. Louis. Tomohiro Ohsumi/Bloomberg
James Bullard, president of the Federal Reserve Bank of St. Louis. Tomohiro Ohsumi/Bloomberg
Aug. 18 (Bloomberg) -- Dennis Gartman, an economist and editor of the Gartman Letter, talks about the U.S. Treasury market. Gartman, speaking with Margaret Brennan on Bloomberg Television's "InBusiness," also discusses hedge-fund icon Stanley Druckenmiller's plan to shut his firm and the outlook for commodities and currencies. (Source: Bloomberg)
The Federal Reserve should purchase more U.S. Treasury securities and expand its balance sheet if the weakening U.S. economy shows signs that inflation is slowing, St. Louis Fed President James Bullard said.
“Should economic developments suggest increased disinflation risk, purchases of Treasury securities in excess of those required to keep the size of the balance sheet constant may be warranted,” Bullard said today in a speech in Rogers, Arkansas.
Bullard supported the Fed’s decision last week to keep its bond holdings at $2.05 trillion by reinvesting the proceeds from maturing mortgage-backed securities into Treasuries. The Federal Open Market Committee, seeking to spur economic growth, held the main interest rate unchanged at zero to 0.25 percent, where it’s been since December 2008, and affirmed a pledge to keep rates low for “an extended period.”
The decision led some investors to conclude that the economic outlook was worse than they thought, Minneapolis Fed President Narayana Kocherlakota said Aug. 17. “In my view, this reaction is unwarranted,” he said.
Prospects for the economy, while downgraded in recent months, are still favorable, Bullard said.
The outlook “remains positive,” Bullard said. “Continued expansion is the most likely course going forward.”
Dramatic improvement in housing sales looks unlikely in the near term, Bullard said. Labor markets have been weak, with private-sector job growth below analyst expectations, he said.
Size of Program
Fed officials are preparing contingency plans focused on issues such as the size of any new asset purchase program, and how often it should be adjusted, Bullard told reporters after the speech.
“All of that is being thought about and debated,” he said. “We have to be ready, especially if we got some other kind of surprise that was on the downside and led to some more disinflation. We do have to be ready to set up a program and put it in place.”
At the same time, Bullard said he aimed with his speech to rebut any notion that the Fed was in a crisis mode again.
“I wanted to push back against the idea that if we were going to do this, we would do this in the crisis mode we were in 2008 and early 2009,” he told reporters. “We are way beyond that at this point. The economy is far stronger.”
Core Inflation
“Today, with core inflation at low but manageable levels and the economy expected to continue to expand, no action is necessary” to expand Treasury purchases, he said in his prepared remarks. “Fortunately,” expected inflation today “remains relatively high.”
If purchases become necessary, the size “should be in proportion to the size of any deterioration in the outlook,” he said. “One key goal of the program is to keep core inflation in the U.S. from falling close to levels observed in Japan.”
Bullard echoed his comments from last month, when he said the country faces a rising risk of Japanese-style deflation. “The U.S. is closer to a Japanese-style outcome today than at any time in recent history,” Bullard said in a research paper.
After cutting rates to near zero, the Fed turned to its balance sheet as a primary tool of monetary policy. The Fed’s total assets, which include loans and securities other than those used for monetary-policy operations, rose to $2.33 trillion last week from $878 billion at the start of 2007.
Policy Tools
Bullard, in response to audience questions, said lower 10- year note yields and lower mortgage rates following the Fed’s meeting suggest its actions are working. That may help to confirm his view the central bank hasn’t run out of policy tools, he said.
“I am not a person who thinks we have run out of ammunition,” he said.
Last October, Bullard called for a quantitative rule to determine the suitable amount of asset purchases so that the level of the Fed’s balance sheet would be adjusted based on incoming data on the U.S. economy. Bullard said he still favors gradual adjustments to the purchase program.
“Large, sudden purchases rarely are optimal,” he said. “‘Shock and awe’ is almost never a good way to proceed.”
“Policy actions should be commensurate with the risks that the economy faces,” he said. “A series of smaller policy actions can add up to a large action, but only if incoming data suggest that as the appropriate course.”
Out of Respect
Bullard told reporters while he continues to have concerns with the “extended period” language, he decided not to dissent out of respect for the Fed’s past practices.
“The tradition in the committee is you argue vociferously and then you rally around the chairman at the end,” he said. “I respect that. I wouldn’t say I would never dissent. It is better practice to try to convince your colleagues.”
Economists have lowered their forecasts for the second half of this year. Gross domestic product will expand at an average 2.55 percent annual rate in the last six months of 2010, according to the median of 67 estimates in a Bloomberg News survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month.
To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;
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