Fed’s Bullard Says Low Inflation May Warrant Longer QE

Federal Reserve Bank of St. Louis President James Bullard, who has voted this year in favor of maintaining stimulus, said inflation below the central bank’s 2 percent target may warrant prolonging the “aggressive” use of bond buying to spur growth and bring down unemployment.

While “labor market conditions have improved since last summer,” Bullard said today in remarks during a panel discussion in Montreal, “surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame.”

The Federal Open Market Committee, which meets next week, is discussing when to slow $85 billion in monthly bond purchases, with San Francisco Fed President John Williams saying last week a “modest adjustment downward” in the buying is possible as “early as this summer.” Atlanta Fed President Dennis Lockhart said “very mixed” economic data makes him “more cautious” about a near-term reduction in purchases.

The FOMC said May 1 it will continue buying bonds “until the outlook for the labor market has improved substantially.” Payrolls rose 175,000 in the U.S. last month, while the unemployment rate climbed to 7.6 percent, Labor Department figures showed June 7.

“Bullard is a hawkish-leaning centrist on the FOMC and his comments should be taken quite seriously,” said Ward McCarthy, chief financial economist at Jefferies Group LLC in New York and a former Richmond Fed economist. “This is an inopportune time to be talking about curtailing QE,” or quantitative easing, he said. “They are missing on the inflation mandate.”

Incremental Adjustments

Bullard was the first FOMC participant to push for “meeting to meeting” incremental adjustments to its bond buying in response to economic indicators.

Slow but steady growth, improving labor markets and limited excesses in financial markets “suggests that the FOMC can continue to pursue its aggressive asset purchase program,” he said.

“Inflation in the U.S. has surprised to the downside,” Bullard said in his speech to the International Economic Forum of the Americas conference.

Inflation “has been going down and it hasn’t moved back at all,” Bullard said in response to an audience question. “I am still waiting for that to happen and I am getting a little bit nervous.”

Price gains as measured by the personal consumption expenditures price index rose 0.7 percent for the year ending April, below the central bank’s 2 percent goal.

Slowing Inflation

Since 2010, Bullard has expressed concern that slowing inflation could lead to deflation, or a broad decline in prices, and Japanese-style economic stagnation. He has also said the FOMC needs to safeguard the credibility of its inflation target, defending the goal when price gains are either too high or too low.

The St. Louis Fed chief said he wants “to see some reassurance” from inflation data “before we start to taper our asset purchase program.”

U.S. stocks were little changed, with the Standard & Poor’s 500 Index at 1,642.81 at the close of trading in New York. The yield on the 10-year Treasury note increased 0.04 percent to 2.21 percent.

Bullard told reporters after his speech that he was encouraged by a shrinking of the U.S. deficit.

‘Sustained Growth’

“The deficit and debt situation is improving in the U.S. and that’s a reflection of sustained growth,” Bullard said. “It’s another indication that the U.S. outlook is improving, but like I say, you would expect inflation would be running higher if that was the case and that’s not happening, so it’s a little bit of a head-scratcher.”

Standard & Poor’s raised the U.S.’s AA+ credit rating outlook to stable from negative, based on receding fiscal risks, less than two years after stripping the world’s largest economy of its top ranking. Bullard said he hadn’t yet seen today’s S&P report.

“I’d be surprised if the Congress has done enough really to get us back onto a sustainable path,” he said.

The possibility of excesses such as asset price surges “bears careful watching,” Bullard said in his prepared remarks.

“An important concern for the FOMC is that low interest rates can be associated with excessive risk-taking in financial markets,” Bullard said. “So far, it appears that this type of activity has been limited since the end of the recession in 2009.”

Record Stimulus

Kansas City Fed President Esther George, who has dissented this year from record stimulus, has warned of asset price bubbles. In a speech last week she cautioned of overheating in the use of margin accounts at broker-dealers and leveraged loans, or packages of higher-risk commercial loans.

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.

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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