Federal Reserve Bank of St. Louis President James Bullard said Europe risks an extended period of low growth and deflation like Japan’s unless the European Central Bank acts with an aggressive quantitative easing program.
“You should worry about it, and then take policy action to avoid it,” Bullard said in Frankfurt today in response to an audience question after a speech. “You want to be pretty sure that you don’t get stuck in that situation, and one way to get stuck would be to be passive in this situation and not take some aggressive action to try to get inflation back.”
While the ECB has lent banks unlimited funds for up to three years and pledged to buy bonds of countries engaged in economic adjustment plans, policy makers have shied away from committing to bond buying known as quantitative easing. Bullard, who votes on the Federal Open Market Committee this year, and his colleagues in the U.S. are buying $85 billion in Treasuries and mortgage-backed securities a month to spur growth.
“The lesson in Japan is once you get stuck there, it’s pretty hard to get out,” Bullard said today at the Institute for Monetary and Financial Stability. “They’re trying very hard right now and so maybe they’ll be successful but this time around we’ll see. But it’s been very hard to get out.”
Speaking in the ECB’s home town, Bullard said the central bank’s governing council may want to consider a quantitative easing program that’s weighted to account for gross domestic product differences in the 17-member euro area.
The euro-area economy shrank more than economists forecast in the three months through March, extending a recession to a record sixth quarter. GDP fell 0.2 percent after a 0.6 percent decline in the previous quarter, the European Union’s statistics office in Luxembourg said on May 15. The annual inflation rate dipped to 1.2 percent in April, the lowest since February 2010. The ECB aims at inflation just under 2 percent.
Bank of Japan Governor Haruhiko Kuroda said April 4 he would double the purchases of government bonds to more than 7 trillion yen ($68.3 billion) a month to achieve 2 percent inflation in two years. Prime Minister Shinzo Abe’s government announced 10.3 trillion yen in extra spending in January to stimulate an economy that shrank for two quarters last year.
“They just stayed at zero for 15 years thinking that eventually they would come out of that equilibrium and it never happened, so now they’re having to take more extreme measures,” Bullard said today of interest rates in the world’s third-largest economy, which fell behind China in 2010.
Bullard said in his prepared remarks that the Fed should continue its bond buying because it’s the best available option for policy makers to boost growth that is slower than expected.
The purchases known as quantitative easing should be maintained in the U.S. because financial markets indicate that they are improving financial conditions and can be adjusted based on how the economy changes, Bullard said today.
“Quantitative easing is closest to standard monetary policy, involves clear action and has been effective,” Bullard said. The panel should continue the program while “adjusting the rate of purchases appropriately in view of incoming data on both real economic performance and inflation.”
Fed officials are debating how and when to eventually curtail the purchases that have expanded the central bank’s balance sheet to a record $3.35 trillion. The FOMC said May 1 it will keep buying $85 billion in Treasuries and mortgage bonds per month to boost employment and spur the economy.
Bullard, 52, joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
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