Bullard Says Economic Growth Will Probably Accelerate

Federal Reserve Bank of St. Louis President James Bullard said signs of more stability in U.S. fiscal policy, the housing market and the global economy will probably help fuel economic growth in 2013.

“This year seems to be characterized by less macroeconomic uncertainty compared to previous years,” Bullard said today in a speech in Jonesboro, Arkansas. “This bodes well for U.S. macroeconomic prospects in 2013.”

Bullard backed the Federal Open Market Committee decision last month to continue buying bonds at a rate of $85 billion a month after gross domestic product fell 0.1 percent in the fourth quarter. Policy makers have pushed the benchmark interest rate close to zero and expanded Fed assets to a record exceeding $3 trillion to fuel growth and reduce 7.9 percent unemployment.

U.S. economic weakness from last quarter persisted in January. Consumption slowed last month, with retail sales rising 0.1 percent after a 0.5 percent increase in December, hurt by higher payroll taxes, Commerce Department figures showed today.

Most Fed policy makers expect growth of 2.3 percent to 3 percent this year, according to forecasts in December. Bullard said to reporters today the economy will probably expand 3.2 percent both this year and in 2014, with the unemployment rate falling to 7.2 percent by the end of this year.

Incremental Changes

As the labor market improves, the Fed should reduce its monthly bond purchases, making incremental changes similar to how it alters its target interest rate, Bullard, 51, said to reporters after his speech.

“As you see improvement, you should acknowledge that improvement and say, ‘we’ll go down to $75 billion a month,’” he said. Before recommending a change to the Fed’s current rate of bond buying, Bullard said he wants “to see through the spring at least how the economy develops.”

In his prepared remarks to Arkansas State University’s agribusiness conference, Bullard said, “Housing markets appear to be more robust” compared with a year ago, when a continued decline in housing prices seemed possible.

“The trend is definitely upward in those prices” and a decline “has been taken off the table,” Bullard said.

Responding to audience questions, the St. Louis Fed leader said low inflation has allowed the central bank to be more aggressive with stimulus. “Because inflation is running below our 2 percent target, the Fed has some room to maneuver.”

Create Distortions

Still, Bullard said he is concerned low interest rates may cause distortions in asset prices. He said he is monitoring the market for farmland for signs of a price bubble, noting the challenge of determining whether fundamental factors like increased demand have recently pushed up land prices.

“Low rates are one aspect of higher farmland prices,” he said. “I have been concerned and continue to be concerned” about the potential for a bubble.

U.S. stocks pared early advances, with the Standard & Poor’s 500 Index adding less than 0.1 percent to 1,520.28 at 4 p.m. in New York. The 10-year Treasury note yield rose four basis points, or 0.04 percentage point, to 2.02 percent.

The U.S. elections last year cleared up some uncertainty, with fiscal concerns “partially resolved,” he said. Also, the European Central Bank’s commitment to stimulate regional growth has improved Europe’s outlook.

“While 2012 was marked by a clear downshift in Euro-area economic growth, 2013 will likely see either a stabilization or some recovery,” he said. “In this sense the uncertainty concerning the European outlook has been reduced.”

“Emerging-market economies slowed during 2012, in part due to the European recession, but these economies are now expected to fare better in 2013,” Bullard said. China’s economic growth recently has been “stronger,” he said.

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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