Fed May Need to Reduce $600 Billion Asset-Purchase Program, Bullard Says

The Federal Reserve’s planned $600 billion in Treasury purchases helped improve the U.S. economic outlook and the policy debate may turn to whether to reduce the program scheduled through June, St. Louis Fed President James Bullard said.

“The natural debate now is whether to complete the program, or to taper off to a somewhat lower level of asset purchases,” Bullard said in the text of a speech today in Bowling Green, Kentucky. “Quantitative easing has been an effective tool, even while the policy rate is near zero. The economic outlook has improved since the program was announced.”

Bullard has warned since last July about a rising risk of Japanese-style deflation in the U.S. while calling for purchases of Treasury securities to reduce the threat. The Fed announced the purchase program last November.

Fed policy makers raised their estimates for growth at their meeting last month, while continuing to “express disappointment” in improvements in the labor market, according to minutes of the Jan. 25-26 meeting released Feb. 16. The Fed was divided over whether further evidence of a strengthening recovery would warrant slowing or reducing the Treasury purchases.

Bullard told the Bowling Green Area Chamber of Commerce that global inflation could pull U.S. prices higher than would be expected by looking at the U.S. economic conditions, including a high unemployment rate.

Drive Prices Higher

“The Fed is charged with controlling U.S. inflation, but perhaps global inflation will drive U.S. prices higher or cause other problems,” Bullard said.

“U.S. policymakers often say the U.S. output gap is large,” Bullard said, referring to the amount of slack in the economy caused by high unemployment and spare capacity. “This is interpreted as putting downward pressure on U.S. inflation. The global output gap is probably much narrower or even positive; this would then be interpreted as putting upward pressure on inflation.”

At the same time, Bullard described current inflation as “quite low” and he reiterated his view in favor of a formal inflation target.

The Fed’s most closely watched inflation gauge, the Commerce Department’s core personal consumption expenditures price index excluding food and energy, rose 0.7 percent in December from a year earlier, the smallest advance since records began in 1959.

Non-Voting Position

Bullard, 49, voted in favor of the Treasury purchase program in November and has rotated this year into an annual non-voting position. He joined the St. Louis Fed’s research department in 1990 and became president of the bank in 2008.

The unemployment rate fell to 9 percent last month from as high as 10.1 percent in October 2009. The U.S. economy expanded at a 3.2 percent annual rate in the fourth quarter, as consumer spending climbed by the most in more than four years, figures from the Commerce Department showed on Jan. 28.

The Fed’s presidents and governors raised their forecasts for growth this year and expect the economy to grow between 3.4 percent and 3.9 percent, according to minutes of their Jan. 25-26 meeting. Forecasts increased from November predictions of 3 percent to 3.6 percent as household spending picked up and recent economic data showed a “stronger tenor.”

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

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

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