Federal Reserve Bank of St. Louis President James Bullard said disappointing job creation hasn’t changed the U.S. economic outlook and the Fed should be careful not to prompt borrowing by consumers with excessive debt.
“Monetary policy has been ultra-easy during this period, but cannot reasonably encourage additional borrowing by households with too much debt,” Bullard said in remarks today to the Bipartisan Policy Center in St. Louis. “The recent nonfarm payrolls report was disappointing, but not enough to substantially alter the contours of the U.S. outlook.”
U.S. job growth slowed to 69,000 last month from a high this year of 275,000 in January even as the Federal Open Market Committee sustained record stimulus, including a pledge to keep the benchmark interest rate near zero until at least late 2014.
Still, a policy change isn’t needed as more action by the Fed won’t help stem Europe’s debt crisis and the FOMC has time to wait before making any alterations, Bullard said.
“One possible FOMC strategy is to simply pocket the lower yields and continue to wait-and-see on the U.S. economic outlook,” Bullard said. While Europe’s turmoil is driving global problems, “a change in U.S. monetary policy at this juncture will not alter the situation in Europe.”
The U.S. recovery from the collapse in the housing price bubble will take “many years,” and “households are saddled with far too much mortgage debt,” Bullard said.
The housing crisis scared off the next generation of Americans from purchasing homes because younger consumers are wary of buying real estate and prefer renting, Bullard said. That’s causing growth in the number of new multi-family homes to outpace single-family homes, he said.
“The housing bubble did tremendous damage to the U.S. economy,” Bullard, who doesn’t vote on monetary policy this year, said in his remarks. “That’s going to take a long time to repair.”
The Standard & Poor’s 500 Index rallied 0.6 percent to 1,285.50 as of 4:40 p.m. in New York. The benchmark 10-year Treasury yield rose five basis points, or 0.05 percentage point, to 1.57 percent after falling as much as two basis points to 1.51 percent.
The European debt crisis doesn’t warrant Fed action even though “the situation in Europe is grave,” Bullard said to reporters after his speech. U.S. banks would be better able to weather a financial “meltdown” in Europe than they were a few years ago, he said.
“This is a problem for Europe and it has to be solved by Europeans, so I don’t think the Fed should get involved,” he said. “U.S. banks are much better prepared for a possible financial meltdown in Europe than they were a few years ago. They are holding higher levels of capital and they have divested a lot of the more problematic assets.”
Policy makers are trying to sustain the U.S. recovery with record-low interest rates that have yet to spur a rebound in the housing market. The S&P/Case-Shiller index of property values in 20 cities dropped 2.6 percent in March from a year earlier after a 3.5 percent decline in February, the group reported May 29.
Also, the number of Americans signing contracts to buy previously owned houses fell in April by the most in a year, the National Association of Realtors said May 30.
“Despite some signs of improvement, the housing sector remains depressed,” policy makers on the Federal Open Market Committee said in a statement after their meeting on April 25.
JPMorgan Chase & Co. and Morgan Stanley say Fed policy makers, who plan to meet June 19-20 in Washington, are more likely to buy additional government-backed mortgage securities following indications U.S. job creation is slowing.
A June 1 report that the U.S. in May added the fewest jobs in a year sent benchmark Treasury note yields to record lows.
Bullard, 51, joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.