Fed’s Bullard Says Monetary Policy Effective Even at Zero Rates

Federal Reserve Bank of St. Louis President James Bullard said monetary policy has influenced inflation and price expectations, even with the benchmark interest rate near zero since December 2008.

“Stabilization policy should be left to the monetary authority, which can operate effectively” with interest rates near zero, Bullard said today in a speech in Chicago. By contrast, the use of tax and spending changes to respond to shocks in the economy over the short run “has run its course.”

Fed officials are divided over whether the central bank should wait to see if the economy deteriorates before taking additional steps to try cutting borrowing costs and boosting job creation. The U.S. economy is growing moderately amid “apparent slowing” in global growth, with “some improvement in overall labor market conditions,” Fed officials said last month. The economy gained 200,000 payroll jobs in December and the unemployment rate fell to 8.5 percent from 8.7 percent in November, figures from the Labor Department showed yesterday.

“The turn toward fiscal approaches to stabilization has run its course,” Bullard said in the text of slides prepared for a speech to the Korea-America Economic Association. “Tax and spending policy should be set for the medium and longer term.”

Bullard, 50, who doesn’t vote on monetary policy this year, was the first Fed official in 2010 to call for a second round of asset purchases. He published a paper in 2010 entitled “Seven Faces of the Peril,” which called on the Fed to avert deflation by purchasing Treasury notes, a policy known as quantitative easing.

Bank President

Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.

The U.S. consumer-price index increased 3.4 percent in the 12 months ended November, the smallest year-over-year increase since April, a Labor Department report Dec. 16 showed. Excluding volatile food and energy, the core CPI climbed 2.2 percent from November 2010, the most since October 2008.

The Fed’s preferred price gauge, the Commerce Department’s measure that excludes food and fuel and is tied to consumer spending, was up 1.7 percent in the year ended in November, at the lower end of Fed policy makers’ long-run projection of 1.7 percent to 2 percent.


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