James Bullard, president of the Federal Reserve Bank of St. Louis, said inflation has fallen too far below the Fed’s 2 percent goal, and a further drop could prompt increased asset purchases by the central bank.
“Inflation should be closer to target than it is, and we should defend the inflation target from the low side,” Bullard told reporters today after a speech in New York. “If it doesn’t start to turn around here soon, I think we’ll have to rethink where we are in our policy.”
One option would be for the Federal Open Market Committee to increase monthly purchases from $85 billion, the level reaffirmed in March, Bullard said. The policy group said bond buying will continue until the labor market outlook improves “substantially” and pledged to keep interest rates near zero as long as unemployment is above 6.5 percent and inflation doesn’t exceed 2.5 percent.
“I think we could do more if we had to,” Bullard said. “I don’t want to give you the impression that I’m willing to do more today.”
Consumer prices rose 1.3 percent in February from a year earlier, according to the Fed’s preferred gauge of inflation. That matches the lowest level since October 2009. Still, Bullard said the concern over disinflation is “not quite as bad as it was in the fall of 2010.”
That year, the Fed heeded Bullard’s call for a second round of bond buying, known as quantitative easing, which ran from November 2010 until June 2011.
Any new purchases should be in Treasury securities rather than mortgage bonds because the market is larger, he said. Bullard said he “would like to see the Fed eventually return to an all-Treasuries portfolio.”
By contrast, minutes of the March 19-20 FOMC meeting showed that a number of Fed officials said the central bank should begin slowing its bond-buying program later this year and stop it by year end.
Among Fed policy makers, Fed Minneapolis Bank President Narayana Kocherlakota has urged more stimulus by reducing the threshold for consideration of a policy tightening to a 5.5 percent unemployment rate. In a speech this week, Kockerlakota predicted inflation pressures will “remain subdued” and urged “a more accommodative monetary policy that puts more upward pressure on prices.”
A recent plunge in gold prices doesn’t have implications for forecast inflation, though it does point to weakness in the global economy, the St. Louis Fed president said.
“Europe is in recession, and China is not growing quite as fast as before so those two factors would seem to suggest global commodity demand would be down some,” Bullard told reporters.
Global stocks fell today amid losses in industrial metals and disappointing earnings from Bank of America Corp. and others. The euro weakened as Germany’s central bank chief Jens Weidmann reportedly said European policy makers may cut rates if needed.
The Standard & Poor’s 500 Index fell 1.8 percent to 1,545.93 at 12:45 p.m. in New York. The euro weakened 1.1 percent to $1.3032 as it fell against 14 of 16 major peers. Copper sank 3.4 percent in London and tin and lead tumbled at least 2.4 percent, while gold added 0.7 percent to $1,378.01 an ounce, rebounding for a second day after falling 9.1 percent two days ago, the most in three decades.
Bullard, 52, who calls himself the “North Pole of inflation hawks,” has been viewed as a bellwether for investors because his views have sometimes foreshadowed policy changes. He published a paper in 2010 entitled “Seven Faces of the Peril,” which called on the central bank to avert deflation by purchasing Treasury notes.
At the time, he also called for the Fed to engage in open-ended bond purchases, without a set goal or ending date. That approach has been adopted in the latest round of purchases
In his prepared remarks, Bullard said monetary policy should be guided by the central bank’s price-stability goal, and it would be a mistake to place a greater focus on high unemployment.
The unemployment rate has been dropping 0.7 percentage point a year since its peak after the recession and will be in the “low 7 percent range by the end of 2013,” he said at the Hyman Minsky Conference, hosted by the Levy Economics Institute.
In response to audience questions, Bullard cited the example of Germany’s labor-market reforms as a model for U.S. policy makers.
“Germany has been very impressive on the labor market dimension” in recent years, he said. “You could copy their policies” to encourage jobs, while monetary policy itself is a “very blunt instrument” that can’t be targeted.
Fed Vice Chairman Janet Yellen yesterday said she favors holding the benchmark interest rate “lower for longer,” while New York Fed President William C. Dudley said a slowdown in the pace of employment growth in March highlights the need to maintain the pace of bond purchases.
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.