Federal Reserve Bank of St. Louis President James Bullard said demand from emerging markets may push up oil prices faster than other goods, making unsuitable a Fed focus on price indexes excluding energy and food.
“It is at least a reasonable hypothesis that global demand for energy will outstrip increased supply over the coming decades,” Bullard said today in a speech at Cape Girardeau, Missouri, that was identical to a talk yesterday. “If that scenario unfolds, then ignoring energy prices in a price index may systematically understate inflation for many years.”
A focus on overall price indexes can bolster the Fed’s credibility, which may decline if policy makers seem out of touch with households struggling to pay more for food and energy, Bullard said. Oil advanced 2 percent at 3:25 p.m. in New York after Goldman Sachs Group Inc. said it’s turning “more bullish” on raw materials.
The Fed may keep its main interest rate, monetary policy language and the size of its balance sheet the same after completing $600 billion in purchases of U.S. Treasury securities next month, Bullard said, reiterating comments this month.
Such a decision would allow time for assessing inflation and the U.S. economic outlook and may be followed by a tightening of policy later this year, Bullard said.
“We are close to the high tide for easy monetary policy,” he said. “If all goes well, we will be in a good position to take back some of the accommodation in the second half of the year or after that depending on how the economy performs.”
Bullard told reporters after his speech he was confident the U.S. economic recovery was sustainable, supported by a pickup in private-sector job creation. First-quarter growth may be revised higher from the reported 1.8 percent, Bullard said.
“The second quarter, I think, will come in between 3 and 4 percent, and I think job growth will continue,” he said. “We are in good condition in the U.S. economy. There is some risk from these events around the world, but generally speaking, we are in good shape.”
The European debt crisis is the top risk to U.S. growth, Bullard said. While not a “global macroeconomic shock,” it poses the possibility of such instability, he said.
While unemployment is forecast to be about 8.5 percent in the fourth quarter, according to a survey of economists this month by Bloomberg News, such joblessness wouldn’t be so high as to postpone the start a tightening cycle, Bullard said.
“As long as unemployment is moving in the right direction, we’ll be fine,” he told reporters. “Even if we start to remove some accommodation, monetary policy will still be very easy. It is not a matter that you are taking away the entire punch bowl at once,” he said.
Bullard urged Congress to work to fix the growing U.S. debt and deficits. Without a fix, yields on U.S. government bonds could go “much higher,” he said. The yield on the benchmark 10-year Treasury note was 3.12 percent at 3:52 p.m. today in New York, less than the average of 4.08 percent during the last decade, Bloomberg data show.
“It is imperative Congress come to a solution for our very high debt and deficits,” he told reporters. “Our numbers as a nation look worse than some of the worst offenders in Europe. The only reason we are able to get away with this is we have a long track record.”