Federal Reserve Bank of St. Louis President James Bullard said current U.S. monetary policy is appropriate and additional easing would risk a surge in inflation.
“The ultra-easy monetary policy has been appropriate so far, but could reignite a 1970s-type experience globally if pursued too aggressively,” Bullard said in a speech in Little Rock, Arkansas, noting that the 1970s era included four recessions in 13 years, double-digit inflation and double-digit unemployment. The lesson of that decade: “Do not let the inflation genie out of the bottle.”
The Federal Open Market Committee said on June 20 it will expand the Operation Twist program to extend the maturities of assets on its balance sheet and stands ready to take further action as needed. The Fed also repeated its expectation that low inflation and economic slack will make it appropriate to keep its benchmark interest rate near zero until at least late 2014.
“If anything, the Committee may be trying to do too much with monetary policy, risking monetary instability for the U.S. and the global economy,” Bullard said, saying labor-market policies can better address high unemployment. “The Committee can respond as appropriate to a significant deterioration relative to the current forecast.”
Bullard told reporters after his speech that “I wanted to end the Twist program but I was willing to go with the committee’s judgment and the chairman’s judgment” that it was still needed in light of “somewhat weaker” data and risk from Europe. Bullard, who doesn’t vote on monetary policy this year, does participate in FOMC meetings.
The U.S. economy is likely to expand at about a 2.4 percent rate this year and “a little over 3 percent” in each of the following two years, he said.
While those figures were revised down at the recent Fed meeting, the slowdown isn’t enough to prompt a third round of so-called quantitative easing, Bullard told reporters.
“To get to QE3, you would have to get a sharp drop-off in economic activity in the U.S. or a clear threat of deflation,” he said. “As things stand right now, I don’t see either one of those.”
Bullard also said a proposal for a quarterly monetary policy report, which he and Philadelphia Fed’s Charles Plosser have advocated, has a “distinct possibility” of happening and would take “probably a couple of quarters to get it going” if the policy makers were to reach agreement.
“I think there is interest in the Fed in producing something like this,” Bullard told reporters. “I am not saying any decisions have been made, but I do think there is interest because it is not clear” the release of economic projections “is the best long-run outcome.”
Bullard was the first Fed official in 2010 to call for a second round of asset purchases by the central bank. The Fed pushed down its target interest rate close to zero in December 2008 and has engaged in two rounds of asset purchases totaling $2.3 trillion in a bid to lower long-term borrowing costs and boost the economy.
Inflation is near the Fed’s 2 percent goal, and falling prices are not a current threat, Bullard said. “The U.S. price level appears to be quite close to an appropriate price level path,” he said.
Chicago Fed President Charles Evans this week repeated his call for more asset purchases to try to accelerate growth, while Atlanta Fed President Dennis Lockhart said purchases should be “on the table” and used if the economy deteriorates or prices seem likely to drop. Richmond Fed President Jeffrey Lacker dissented last week from the Fed’s $267 billion extension of Operation Twist, asserting it will spur inflation and not significantly help the economy.
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.