Fed Should Consider Curtailing Stimulus Program, Bullard Says

St. Louis Fed President James Bullard
Federal Reserve Bank of St. Louis James Bullard. Photographer: Tomohiro Ohsumi/Bloomberg

St. Louis Federal Reserve Bank President James Bullard said policy makers should review whether to curtail a plan to buy $600 billion in Treasury securities, noting that the U.S. recovery may not need that much stimulus.

“The economy is looking pretty good,” Bullard said to reporters in Marseille, France, on March 26. “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short,” he said, referring to the second round of so-called quantitative easing.

Chairman Ben S. Bernanke has given no indication the central bank will deviate from its plan to buy bonds through June to spur economic growth and reduce 8.9 percent unemployment. Bullard, who in July became the first policy maker to call for Fed purchases of Treasuries, has said the Federal Open Market Committee should review the plan at every meeting and, if necessary, continue it indefinitely.

Bernanke said in two days of congressional testimony this month that while growth will accelerate this year, he still wants to see a “sustained period of stronger job creation.” He has avoided indicating what the Fed’s next step will be after finishing the $600 billion of purchases.

“While indicators of spending and production have been encouraging on balance, the job market has improved only slowly,” Bernanke, 57, a former Princeton University economist, said March 1 and March 2 in semiannual hearings on monetary policy.

Close to Zero

Policy makers at their March 15 meeting indicated they see an improving economy that lacks enough strength to warrant removing record monetary stimulus. They left the benchmark federal funds rate in a range of zero to 0.25 percent, where it’s been since December 2008. They also retained a pledge in place since March 2009 to keep the rate “exceptionally low” for an “extended period.”

While the economy is stronger than last summer and fall and quantitative easing should be reviewed, uncertainties remain, including Japan, political tensions in the Middle East, the U.S. fiscal position and the European sovereign debt crisis, Bullard said. U.S. first-quarter gross domestic product may not be as strong as anticipated several weeks ago, and some strengthening may get pushed into the second quarter, he said.

The U.S. economy grew at a 3.1 percent annual rate in the fourth quarter, led by a jump in consumer spending that will be hard to match early in the year as energy prices surge. Rising oil prices sparked by turmoil in the Middle East may erode consumers’ purchasing power, and supply constraints caused by the Japan earthquake and its aftermath slow the pace of recovery this quarter.

‘Not Enough’

The oil price increases so far are “not enough to derail the U.S. recovery at this level,” Bullard said. “If oil prices stabilize where they are, we’ll be fine.” Prices would have to go substantially higher for there to be a “significant and material effect,” he said.

“We have to weigh those in the decision” on whether to stop the Fed’s QE2 program earlier than planned, Bullard said.

U.S. central bankers have said they will keep interest rates near zero for an extended period. In contrast, European Central Bank officials indicated this month that uncertainty caused by Japan’s earthquake may not deter them from raising interest rates next month.

“We’re far away from normal policy,” Bullard said. “I think it’s important to take a few steps back to normality. Even if you make a few small moves, monetary policy will still be accommodative for some time to come.”

‘Still Suffer’

While the economy may still suffer shocks, the “balance sheet should be contingent” and the Fed should be ready if the economy turns down, he said.

“If the economy is as strong as I think it is then I think it may be reasonable to send a signal to markets that we’re going to start withdrawing our stimulus, and I’d start by pulling up a little bit short on the QE2 program,” Bullard said. “We can’t be as accommodative as we are today for too long, we’ll create a lot of inflation if we do that.”

If the Fed opts to start withdrawing stimulus and tighten policy, it should start with the “balance sheet” by selling bonds first, then changing its wording about keeping interest rates near zero for an “extended period” and then raising interest rates, Bullard said.

Bullard has warned since last July about a risk of Japanese-style deflation in the U.S. while calling for purchases of Treasury securities to reduce the threat. Bullard, 50, voted in favor of the Treasury purchase program in November and has rotated this year into an annual non-voting position.

Stronger Economy

Bullard said last month the U.S. central bank may need to reduce the amount of purchases in light of stronger U.S. economic data. Philadelphia Fed President Charles Plosser and Richmond Fed President Jeffrey Lacker have also urged a review of the purchases in light of a strengthening economy and concern over future inflation.

“It looks like inflation is bottoming out and if we continue that, I think we will have gone past” the worst, he said. “We seem to be turning the corner there, but I would want to see more data on that.”


Before it's here, it's on the Bloomberg Terminal. LEARN MORE