Federal Reserve Bank of St. Louis President James Bullard said the Fed’s pledge to keep interest rates low for an “extended period” represents the longest duration it can signal for holding down borrowing costs.
“I just don’t think it’s a viable option to say we’re going to go to a super extended period,” of low rates, Bullard said to reporters today in St. Louis. “We’ve already said ‘extended period,’ and it’s harder to promise anything even further out.”
The Federal Open Market Committee’s $600 billion asset purchase plan ends today, and Fed officials are discussing how long to wait before tightening policy. One of the “core ideas” to further stimulate the economy, without undertaking additional asset purchases, is to somehow lengthen the central bank’s current interest-rate commitment, Bullard said.
For now, the Fed has “gone on pause, we have to gather more information” to ensure that the economy will strengthen during the second half of the year, he said at his regional bank’s conference on quantitative easing.
“If the economy is not performing well the committee should consider taking additional action,” Bullard said, adding that “the situation today is very different from” the months before the Fed started its second round of bond buying in November.
“Inflation has picked up fairly substantially,” Bullard said, and the central bank’s record $2.87-trillion balance sheet “could turn into a lot of inflation if we don’t play our cards right going forward.”
Fed Chairman Ben S. Bernanke first signaled the central bank may undertake additional bond purchases at an Aug. 27 speech in Jackson Hole, Wyoming. Since that speech, the Standard & Poor’s 500 Index has risen 26 percent. The yield on the 10-year Treasury note rose to 3.16 percent from 2.64 percent on Aug. 27.
Bullard, 50, has led the St. Louis Fed since 2008. Fed presidents rotate voting on monetary policy with Bullard next voting in 2013.
The impact from the Fed’s purchases on the economy will probably take six to 12 months to emerge, Bullard said.
“Real effects are difficult to disentangle because other shocks hit the economy in the meantime,” he said.