Bullard Says Fed More Effective Than Fiscal Policy in Short Run

Federal Reserve Bank of St. Louis President James Bullard said the political process is “ill-suited” to making timely decisions to buffer an economic shock over the short run, and that monetary policy is a better tool.

It is “critical for the nation that Congress gets our medium- and longer-term fiscal situation” under control, Bullard said in a conference call with reporters today, before a speech in St. Louis. Near-term fiscal stimulus steps “are unlikely to work very well.”

The regional chief, who doesn’t vote on monetary policy this year, is among Fed officials who say a new round of bond purchases is unlikely after the U.S. economy gained 200,000 jobs in December. Policy makers are divided over whether to take additional steps to cut borrowing costs and boost job creation, with Bullard’s counterparts John C. Williams in San Francisco and Charles Evans of Chicago calling for more stimulus.

Monetary policy has “been appropriate over the last three years,” Bullard, 50, said before speaking at the Edward Jones Annual Meeting. He questioned whether coupling fiscal stimulus measures with monetary accommodation boosts growth, saying “nothing extra is added” if Fed policy is already effective.

Economic data released since the Fed’s last meeting in December show the unemployment rate fell to 8.5 percent last month from 8.7 percent in November. The economy grew less than previously estimated in the third quarter, with gross domestic product climbing at a 1.8 percent annual rate. That’s down from the 2 percent initially estimated, Commerce Department figures showed on Dec. 22.

Next Meeting

Fed officials, who next meet Jan. 24-25 in Washington, will for the first time publish projections for the benchmark federal funds rate and update their forecasts for economic growth, unemployment and inflation.

Policy makers have held the fed funds rate near zero since December 2008 and have pledged to keep it there through at least mid-2013. Any new asset purchases would follow two rounds totaling $2.3 trillion that lasted from December 2008 until June 2011.

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 bank president’s remarks today are based on a paper titled “Death of a Theory.” In it, he says monetary policy works better than tax and spending changes in protecting the economy from shocks, even when the target for the overnight lending rate between banks is close to zero.

Respond to Shocks

The use of tax and spending changes to respond to shocks over the short run “has run its course,” Bullard said. “Stabilization policy should be left to the monetary authority, which can operate effectively even with a near-zero policy rate,” he said.

Bullard calls on fiscal authorities to focus on the medium-to longer-term, with a “stable” tax code and government spending plan that enables businesses and households to prepare for the future.

Bullard told reporters he is challenging “the notion that when you hit the zero-bound” with interest rates, fiscal stabilization measures become necessary.

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