Bullard Predicts Fed Won’t Cut Interest Rate on Excess Reserves

Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, predicted the Fed won’t cut the interest rate on excess reserves to further stimulate the economy.

“Attitudes haven’t changed very much on that” among policy makers, Bullard said to reporters today after a speech in Rogers, Arkansas. The interest rate that the Fed currently pays on bank reserves is 0.25 percent.

“Unless there was some special situation, some special circumstance, I don’t think we would go ahead with that part of the policy,” he said. “If there was a sharp downturn in the economy, then we might come back and really take a hard look at lowering the” interest rate on excess reserves.

Most Federal Open Market Committee members believed a reduction in the so-called IOER “could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions,” according to minutes of the committee’s October meeting released yesterday.

“It is something we could consider going forward,” Fed Vice Chairman Janet Yellen told the Senate Banking Committee on Nov. 14 in a hearing on her nomination to succeed Ben S. Bernanke as Fed chairman. “It certainly is a possibility.”

Still, the view of most policy makers on the issue hasn’t changed, Bullard said.

“It has been debated for four years,” Bullard said. “I don’t think arguments have changed very significantly.”

Rate Increase

The committee has made progress in persuading investors it views interest rate policy and a decision on tapering of $85 billion in monthly bond buying as separate issues, and that a decision to reduce purchases wouldn’t imply that the FOMC will sooner increase the main interest rate.

“We have made progress on that,” he told reporters. “The chairman has been very clear that the committee views its commitment to rates as a separate arm of policy from its decision on the quantitative easing program.”

The FOMC expects to taper bond buying “in coming months” based on expected improvement in the labor market, according to the minutes.

The St. Louis Fed official said to reporters that the committee could take steps to strengthen “forward guidance” on interest rates, and he would favor setting a 1.5 percent floor for inflation. That would help in “defending the inflation target from the low side,” he said.

Bullard said in response to an audience question that he’s optimistic about the 2014 economic outlook, predicting that headwinds to growth including European recession and household debt reduction will continue to wane next year.

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