Federal Reserve Bank of St. Louis President James Bullard said U.S. growth may have been reduced for many years by a post-crisis reduction in consumer debt and there isn’t much the Fed can do to speed the recovery.
“The aftermath of major financial crises tends to be marked by many years of slower-than-normal growth,” Bullard said today in a speech at South Bend, Indiana, citing research by economists Carmen Reinhart and Kenneth Rogoff. “A version of this seems to have happened in the U.S.”
Bullard said prior to the Fed’s decision last week to expand its holdings of long-term securities that he was opposed to a third round of quantitative easing. He was the first policy maker to voice support for asset purchases in 2010.
The Federal Open Market Committee, led by Chairman Ben S. Bernanke, is seeking to boost growth and reduce 8.1 percent unemployment through open-ended purchases of $40 billion in mortgage debt a month.
“As the dust has settled since 2008, it has become more and more apparent that U.S. real GDP is growing along a different path than the bubble-induced, pre-crisis path,” Bullard said, referring to gross domestic product. “Attempting to target nominal GDP without adjustment for the Reinhart-Rogoff effect could be an unmitigated disaster,” leading to higher inflation, he said.
Once policy is adjusted for the permanent loss of wealth following the crisis, U.S. growth appears to be “about on target,” Bullard, who doesn’t vote on monetary policy this year, said at the University of Notre Dame. Inflation seems to be about on target as well, he said.
The Fed’s latest stimulus has come under criticism this week, with Dallas Fed President Richard Fisher saying more asset purchases would risk higher inflation without speeding up employment gains. Richmond Fed President Jeffrey Lacker, who dissented, said there would be a “minimal effect on jobs.”
Boston Fed President Eric Rosengren, meanwhile, said the action was necessary to prevent long-term scarring of the labor market and Atlanta Fed President Dennis Lockhart said job creation has been “far from satisfactory.”
In addition to undertaking more bond buying, the Fed said last week that economic conditions would likely warrant holding their target interest rate near zero through at least mid-2015, extending a previous date of late 2014. The Fed said low interest rates will remain appropriate for a “considerable time” after growth strengthens.
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.