Bullard Says Easy Fed Policy May Create Price Bubbles
Federal Reserve Bank of St. Louis President James Bullard said record easing may create bubbles in the prices of assets such as U.S. farmland.
“The question is, isn’t the zero nominal interest rate policy pushing investors to reach for yield?” Bullard said today in response to audience questions following a speech in St. Louis. “I think I am not alone on the Federal Open Market Committee in worrying about this issue and worrying about we might create some kind of bubble situation.”
The Federal Open Market Committee last month voted to continue buying $40 billion in mortgage bonds each month, aiming to fuel economic growth and reduce 7.9 percent unemployment. The central bank each month is also swapping $45 billion in short- term Treasuries for longer-term debt in a program called Operation Twist scheduled to end in December.
“In our district, we sometimes worry about land prices,” Bullard told reporters after his speech at Washington University in St. Louis. “Some reports of land prices are that they are substantially higher and have been growing for awhile -- farm land -- and we are certainly keeping a watch on that.” He said it may not now be a “bubble.”
Extending Operation Twist is “unlikely” because the Fed has “only so much balance sheet we could use” to sell short- term securities, Bullard said. On the other hand, purchasing Treasuries outright “is definitely an option on the table.”
Bullard told reporters after the speech that he expects about 3.5 percent economic growth next year, with the unemployment rate falling to 7.2 percent by year’s end.
“The headwinds we have been facing have been lessening gradually over time,” he said. “Housing in particular has had a better year in 2012 than the previous years. The European sovereign debt crisis, I think, is in a pause mode here for the past several months.”
Fed district bank presidents have voiced differing views on the benefits of more easing. Richmond Fed President Jeffrey Lacker, after voting against the Oct. 24 FOMC decision, said more stimulus may cause “an unwanted increase in inflation.”
Boston Fed President Eric Rosengren said on Nov. 1 the central bank should buy mortgage bonds until the jobless rate falls from 7.9 percent to 7.25 percent and hold the target interest rate near zero until hitting 6.5 percent unemployment. San Francisco Fed President John Williams, who votes on policy this year, said on Nov. 5 the central bank should press on with $40 billion in bond buying each month until it purchases a total of at least $600 billion.
After concluding a two-day meeting on Oct. 24, the FOMC said it expects to keep the federal funds rate low through at least mid-2015, repeating a pledge from Sept. 13. Several members would prefer to link policy to specific economic conditions instead of a date, minutes of the September meeting showed.
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.
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