Bullard Says Fed Shouldn’t Rush to Ease Further as Recovery Picks Up Speed

James Bullard, president of the Federal Reserve Bank of St. Louis, said recent economic reports point to stronger economic growth, and policy makers shouldn’t rush to ease further.

“The data have come in stronger than expected, so I think the logical thing now is to wait and see,” Bullard said in an interview in New York today at the Bloomberg Hedge Fund Conference hosted by Bloomberg Link. “See if we continue to get a good read on the holiday season and start out the New Year stronger or weaker, and also assess the situation in Europe and see how that feeds back to the United States.”

Fed officials are debating whether the central bank should resume large-scale purchases of securities to push down an unemployment rate that has been stuck near 9 percent or higher for more than two years. The central bank has said the European sovereign-debt crisis poses a risk to the U.S. expansion, and some policy makers at the last meeting Nov. 1-2 said the Fed should consider easing further, according to minutes of the session.

Bullard said growth next year will probably accelerate to a pace of 3 percent to 3.5 percent. The world’s largest economy expanded at a 2 percent annual pace in the third quarter, compared with 1.3 percent in the second quarter and 0.4 percent in the first three months of the year.

“I think we can grow somewhat stronger in 2012 than we have in the second half of 2011,” Bullard, 50, said. “The real question is what is this tail risk in Europe and how big is this tail risk coming from Europe.”

Moderating Inflation

The Fed should also wait to see how much the rate of inflation moderates, Bullard said in a separate interview on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays.

“Inflation is higher now than it was a year ago,” Bullard said. “It is moderating but it really hasn’t moderated all that much yet. And so I’d like to see further evidence that inflation is going to moderate.”

The consumer price index rose 3.5 percent in the 12 months through October compared with a 3.9 percent increase in the 12 months through September. In October 2010 the index had risen 1.2 percent over a year.

Manufacturing in November expanded faster than forecast, a report from the Institute for Supply Management showed today. The Tempe, Arizona-based institute’s manufacturing index rose to 52.7 last month from 50.8 a month earlier. Fifty is the dividing line between growth and contraction, and economists surveyed by Bloomberg News projected the gauge would climb to 51.8.

Construction Spending

The Commerce Department said today construction spending in the U.S. rose in October for a third consecutive month on gains in housing and commercial projects.

U.S. stocks fell following the reports. The Standard & Poor’s 500 Index fell 0.1 percent to 1,245.95 at 2:32 p.m. in New York. The yield on the 10-year Treasury note rose 3 basis points to 2.11 percent. A basis point is 0.01 percentage point.

Many U.S. firms may be able to weather Europe’s debt crisis because of their focus on economies in Asia, Bullard said.

“A lot of the big U.S. companies, their growth strategy is in Asia,” Bullard said. “They’ve got businesses in Europe, stable businesses in Europe, that is part of their portfolio. But as far as growth, they’re looking to Asia, and I see Asia as continuing to grow.”

‘Wake-Up Call’

Europe’s debt crisis is “a complete wake-up call for the U.S. fiscal situation,” Bullard said. “You’re talking about economies that were previously considered AAA having tremendous fiscal problems, having trouble borrowing on international markets. Our day will come if we do not address this issue.”

Bullard said he backs yesterday’s decision by the Fed and five other central banks to lower the cost of emergency dollar borrowing by overseas banks.

“I’m happy to support the chairman on this effort to lower the penalty rate on these dollar swaps,” he said, referring to Fed Chairman Ben S. Bernanke.

Bullard spoke a day after the show of force by central banks sparked a global rally in stocks on optimism it will help Europe overcome its debt crisis. The euro rose for a second day today and European bonds climbed, pushing the yield on the French 10-year note down by the most since 1991.

The Fed joined with the European Central Bank and the central banks of Canada, Switzerland, Japan and the U.K. to cut the pricing on dollar liquidity swaps.

Under the program, the Fed lends dollars to the ECB and other central banks in exchange for currencies including euros. The central banks then lend dollars to commercial banks in their jurisdictions through an auction process.

Debt Crisis

The swap arrangements were revived in May 2010 when the debt crisis in Europe worsened. The Fed three months earlier had closed all swap lines opened during the financial crisis triggered by the subprime-mortgage meltdown in 2007.

Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.

The St. Louis Fed district is home to companies such as Wal-Mart Stores Inc. (WMT) in Bentonville, Arkansas, the world’s largest retailer, St. Louis-based Monsanto Co. (MON), the world’s biggest seed company and Memphis, Tennessee-based FedEx Corp. (FDX), operator of the world’s biggest cargo airline.

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Matthew Winkler in New York at mwinkler@bloomberg.net

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

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