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Fed Isn’t on Brink of QE3 With 2013 Rate Promise, Bullard Says

St. Louis Federal Reserve Bank President James Bullard
St. Louis Federal Reserve Bank president James Bullard. Photographer: Scott Eells/Bloomberg

St. Louis Federal Reserve Bank President James Bullard, who was the first Fed policy maker to urge the round of bond purchases that started last year, said the central bank isn’t signaling a third stimulus program with its commitment to keep rates near zero through mid-2013.

“The most likely outcome for the U.S. economy is still that the economy continues to grow at a moderate pace through the second half of the year,” Bullard said late yesterday in a telephone interview. “If the economy is substantially weaker than expected, we could take more action, especially if it was coupled with a renewed deflation risk.”

Bullard, who doesn’t vote on monetary policy this year, said he would have dissented against the Aug. 9 Federal Open Market Committee statement that for the first time attaches a date to its pledge to keep borrowing costs in a range of zero to 0.25 percent. Previously, the FOMC promised to keep interest rates low for an “extended period.”

The change increased speculation among some economists that the Fed will begin a third round of asset purchases, with Goldman Sachs Group Inc. Chief Economist Jan Hatzius predicting a “greater-than-even chance” of more bond buying. The Fed in June concluded a $600 billion bond-purchase plan, and has maintained its balance sheet near record levels by reinvesting proceeds from its securities holdings.

A new round of bond purchases “does not follow naturally” from the 2013 pledge, “because I think we have to get more information about how the economy is going to develop in the second half of the year,” Bullard said. Goldman Sachs’s forecast stems from the firm’s economists having a “more pessimistic outlook than most” economists, he said.

‘Faces of the Peril’

Bullard published a paper in July 2010 entitled “Seven Faces of the Peril,” which called on the Fed to buy Treasury notes, a policy known as quantitative easing, as a way to prevent deflation.

“I think it is a much tougher call to do more QE this time around than it was last year,” Bullard said. “The inflation picture is different this year than it was last year and the risk of deflation is much more remote than it was last year.”

“Moving farther into unchartered territory could be helpful for the economy but might also generate substantial inflation,” he said. “So we have to weigh the risks of going further into unchartered territory.”

Bullard said he opposed setting a date to the rate commitment because it limits the Fed’s flexibility to adjust to new economic data. It could also trigger a “political battle” and create an additional risk of deflation by encouraging public expectations that prices will head toward a “Japanese-style outcome,” he said.

‘In a Box’

“Most importantly, I think it puts the committee in a box if the economy improves and an inflation problem begins to develop,” he said. If inflation rises and the Fed is forced to react before 2013, “that will cost us some in terms of credibility.”

While seven members of the panel favored the action, Dallas Fed President Richard Fisher, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis voted against it. The last time three voters dissented was on Nov. 17, 1992, under Chairman Ben S. Bernanke’s predecessor, Alan Greenspan.

“Policy should be set according to the state of the economy, not according to the calendar,” Bullard said. “I didn’t like putting calendar dates in.”

The Fed’s second round of asset purchases drew criticism from Republicans in Congress. Texas Governor Rick Perry, who is seeking the Republican presidential nomination for 2012, said it would be “almost treacherous -- or treasonous” for Bernanke to increase stimulus spending before the 2012 election.

Policy Debate

Bullard declined to respond directly to Perry’s comments, saying only that monetary policy is in the “middle of the debate” on the economy.

“We have thick skin,” he said. “We are used to criticism from all sides and we get plenty of it. I think that is fine. We try to make the best decisions we can.”

Asked if the “treasonous” comment went too far, Bullard said, “I will leave that to others to judge.”

“Colorful language” is “OK” because critics “feel passionate about it,” he said.

The St. Louis Fed chief said he has reduced his forecast for economic growth for 2011, while still expecting around 2.5 percent growth in the second half.

Gross domestic product, adjusted for inflation, cooled to a 1.6 percent rate in the second quarter from a year earlier. About 70 percent of the time when the pace has fallen below 2 percent, a slump has followed within a year, according to data since World War II in an April study by Jeremy Nalewaik, a Fed board staff economist.

‘Recession Risk’

“I wouldn’t take it as definitive on recession risk,” Bullard said. “These statistical models have some limits. I think they are interesting, but certainly not definitive.”

Bullard’s views have sometimes foreshadowed shifts in the FOMC. A year ago, Bullard, who calls himself the “North Pole of inflation hawks,” called for Treasury purchases as a way to avert what he said was the rising possibility of Japan-style deflation. Policy makers in November approved the $600 billion purchase plan.

Bullard, 50, also spoke out on policy in November 2009, saying history suggested the Fed wouldn’t raise its target federal funds rate until 2012, two years later than expected by private economists at the time.

Bullard has rotated this year into an annual non-voting position. He joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008.

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