Fed's Stimulus Exit May Not Wait for Global Turmoil to Pass, Bullard Says
St. Louis Federal Reserve President James Bullard
Tomohiro Ohsumi/Bloomberg
St. Louis Federal Reserve President James Bullard.
St. Louis Federal Reserve President James Bullard. Photographer: Tomohiro Ohsumi/Bloomberg
The Federal Reserve may need to begin an exit from record levels of monetary accommodation even amid global uncertainties in Japan and the Middle East, St. Louis Federal Reserve President James Bullard said.
“The process of normalizing policy, even once it begins, will still leave unprecedented policy accommodation on the table,” Bullard said at a London dinner hosted by UBS AG, Switzerland’s biggest bank. Fed policy makers “may not be willing or able to wait until all global uncertainties are resolved to begin normalizing policy.”
Risks to the current economic outlook include the European debt crisis, the earthquake and tsunami in Japan, Middle East turmoil that has contributed to rising oil prices, and the U.S. fiscal deficits, Bullard said today. Even with these threats, the U.S. economy has been picking up since the second half of last year, making the exit timing a central question, he said.
If any of the global concerns escalate into an economic shock, then “all bets are off” for an exit plan, Bullard said. “The most likely scenario is that these uncertainties are unwound in relatively benign ways.”
Since last month, Bullard has suggested trimming the Fed’s plan to buy $600 billion in U.S. Treasuries amid stronger economic reports. The Federal Open Market Committee said March 15 the recovery “is on a firmer footing,” while the labor market is “improving gradually.” Policy makers reiterated plans to buy the Treasuries through June to bolster growth.
Improved Data
Bullard said he wants to cut the current round of quantitative easing because monetary policy should be adjusted incrementally in response to economic data, which has improved since last November.
“The economy is stronger and inflation is higher than when we did the decision,” Bullard said. “So why aren’t you adjusting policy? If you are not adjusting, you don’t have a state-contingent policy. It would be an important signal to send.”
The regional Fed chief said he doesn’t think there is a growing consensus among Fed policy makers for cutting the purchase program short.
“I don’t always get my way so it’s very possible that won’t happen. I’m just saying that I think it’s the right way of proceeding at this point,” Bullard said.
Exit Plan
Bullard, in response to audience questions, said a “logical” order for a Fed exit plan would be a “last in, first out” concept in which the last elements of the Fed’s accommodation would be reversed at the start. Thus, the Fed could begin by shrinking its balance sheet including selling assets, then move on to raising interest rates, he said.
Increases in interest rates shouldn’t be done mechanically in quarter-point increments as they were in the last tightening cycle, Bullard said. Rather, larger moves may be needed to respond to economic data, he said.
“The natural debate is how and when the exit should begin,” Bullard said. So far this year, “private sector forecasters and the FOMC all marked up their forecasts” and “anecdotal reports” show “profitable businesses with considerable cash and an improving outlook,” he said.
During an audience question period, Bullard said that household consumption has been increasing and housing, while still weak, isn’t worsening.
“I am still relatively sanguine about growth in 2011,” he said.
Bullard, 50, doesn’t vote on policy this year as part of the annual rotation. He joined the St. Louis Fed’s research department in 1990 and became president of the bank in 2008.
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 cwellisz@bloomberg.net
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