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Bullard Says Rise in Yields Doesn’t Mean QE2 Failing

James Bullard, president of the Federal Reserve Bank of St. Louis. Photographer: Tomohiro Ohsumi/Bloomberg
James Bullard, president of the Federal Reserve Bank of St. Louis. Photographer: Tomohiro Ohsumi/Bloomberg

Dec. 2 (Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard said a recent increase in market interest rates doesn’t mean the central bank’s expansion of monetary stimulus is failing.

Yields on 10-year Treasuries have risen to 2.94 percent from 2.49 percent on Nov. 4, the day after the Fed’s decision to buy $600 billion in Treasuries. While the program “puts downward pressure” on rates, successful policy would generate faster growth and higher real interest rates while also increasing inflation expectations, Bullard said today in a presentation in Washington.

“Therefore, looking at the level of nominal rates alone is insufficient to judge the success of the program,” Bullard said in the presentation to the National Economists Club.

The remarks are part of Bullard’s response to criticisms of the Fed’s program. Bullard is among Fed policy makers who backed the plan in a bid to boost economic growth and lower unemployment. The decision has generated the most intense criticism of the Fed in three decades, especially from Republican politicians, for risking a surge in inflation and a weaker dollar.

Bullard said “dollar depreciation is a normal by-product of an easier monetary policy, provided all else is held constant in the rest of the world.”

Speaking with reporters afterward, Bullard said he doesn’t see Europe’s sovereign-debt crisis having spillover effects yet in the U.S. “At this point, I don’t see any but I’d be cautious about that,” Bullard said.

Plosser Comments

In a separate appearance today, Fed Bank of Philadelphia President Charles Plosser said the asset-purchase program will hinder future efforts to withdraw stimulus and avert a rise in prices.

“One cost of expanding the Fed’s balance sheet is that it will complicate our exit strategy from a very accommodative monetary policy, when that time comes,” Plosser said in remarks prepared for a speech in Rochester, New York.

Bullard responded to another criticism that the Fed is “monetizing” debt issued by the U.S. government. Once the Fed shrinks its balance sheet to “normal, pre-crisis levels,” the Treasury will have “just as much debt held by the public as before the Fed took any of these actions,” he said.

And to skeptics who say the asset purchases won’t be effective, Bullard said monetary-policy easing “produces its maximum impact on real variables in the economy, including output, consumption, and investment, with a lag of six to 12 months.”

December Meeting

Bullard, 49, became the St. Louis Fed’s chief in April 2008. The Dec. 14 Federal Open Market Committee meeting will be the last one this year in which Bullard can vote; he will next have a vote on monetary policy in 2013.

The decision to buy Treasuries has been dubbed QE2 by investors and economists for the second round of quantitative easing, a term for monetary policies that change the quantity of bank reserves.

Bullard told the group he’s “very keen” on the idea that the asset-purchase program will be reviewed regularly, with the potential to adjust the terms in response to incoming economic data. The $600 billion figure is a form of “forward guidance” on how much the Fed expects to buy, Bullard said.

Responding to audience questions, Bullard said he sees scenarios in which the FOMC could decide to pause or extend the purchases based on the strength of economic data. He said he wasn’t an advocate of the $600 billion figure and he’d still like to convince fellow policy makers to decide on purchases on a meeting-to-meeting basis.

Jobless Rate

The FOMC said in its Nov. 3 statement that the jobless rate was too high and inflation too low relative to levels that policy makers deem consistent with the central bank’s legislative mandate for maximum employment and stable prices.

The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed at a 0.8 percent annual pace in the third quarter, down from a 1 percent increase the prior quarter. The central bank’s preferred long-run rate for overall inflation is a range of 1.6 percent to 2 percent; it doesn’t have a core-inflation objective.

Bullard told reporters that he expects the Fed’s asset purchases to stem the disinflation trend next year and send inflation upward.

U.S. employers probably added 148,000 jobs in November, and the jobless rate held at 9.6 percent, based on the median estimates of analysts surveyed by Bloomberg News. The Labor Department issues its monthly jobs report tomorrow at 8:30 a.m.

‘Cautiously Optimistic’

Bullard, in response to an audience question, said he’s “cautiously optimistic” for growth and decline in the jobless rate next year.

At their Nov. 2-3 meeting, Fed policy makers projected a fourth-quarter 2011 unemployment rate of 8.9 percent to 9.1 percent, compared with 8.3 percent to 8.7 percent in their previous forecast in June. Officials said the economy will expand by 3 percent to 3.6 percent next year, down from a 3.5 percent to 4.2 percent projection in June.

Speaking with reporters afterward, Bullard said there were “not a lot of surprises” in the Fed’s disclosure yesterday of recipients of $3.3 trillion in central bank aid during the financial crisis, which showed European firms including Barclays Plc and UBS AG were among the biggest borrowers from emergency lending programs. “You could be protectionist” and say foreign firms aren’t welcome to operate in the U.S., Bullard said.

To contact the reporter on this story: Scott Lanman in Washington at

To contact the editor responsible for this story: Christopher Wellisz at

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