–Bullard: Oil Price Spike Not Severe Enough For Major Econ Impact
–Says Improving Econ Situation Will Help States, Municipalities
–Says Euro Area Sovereign Debt Crisis Has Not Gone Away
–Mideast – A ‘Wildcard’ – But Shock Not Big Enough For QE3
—

LONDON (MNI) – St. Louis Fed President James Bullard has said that
the FOMC could pause the second round of its quantitative easing program
somewhat “shy” of its planned size of $600 billion.

“2011 looks brighter than it did. The natural debate to have at
this point, is should you complete QE2? Or should you pull back a little
bit short? Especially if you’re concerned about the ability to exit,
maybe you don’t want to pile up any more than you have to,” Bullard –
who is a voting member on the FOMC – told CNBC television.

“Maybe you’d like to, you know, be able to set up an exit more
easily … I would see it as possibly finishing the program a little bit
shy of where we intended initially and then go on pause for a while, let
more information on the economy come in, see how it develops,” he said.

“Balance sheet policy has a similar effect as normal monetary
policy, it’s absolutely classic monetary policy. You can use this tool
if you need to, if the economy slows down and things don’t look very you
good, you can use more if you need to,” he added.

Bullard said that the current spike in oil prices is not severe
enough at present to threaten the U.S. economic recovery.

“This has not gone on long enough, you’d have to see if this shock
is really persistent, also it doesn’t strike me that it’s really big
enough at this point, WTI is up, it’s certainly a concern but it’s not
so high at this point,” he said.

“It would have to go substantially higher,” he said, adding that
“persistence is a key issue here, if it falls back in a couple of weeks
then this will go away.”

Bullard was also pressed on the problem of fiscally
challenged states and municipalities, he replied that the improving
economic situation should help ease the difficulties.

“We are concerned about this issue. I do think the improving
economy in 2011 will help calm the situation. A lot of revenue looks
better … if it does come to default, we’ve had big defaults in the US,
it can be done, it’s not the best situation,” Bullard said.

“What I’m most concerned about is a big problem that might look
like the European sovereign debt problem and I don’t think we’re looking
at something like that. In Europe, a sovereign nation like Greece or
Portugal or Ireland, they might borrow 100-125% of GDP … our states
don’t do that.”

Asked what his major concerns are at the moment, Bullard put the
Middle East turmoil and the European sovereign debt crisis at the top of
his list:

“The Middle East turmoil is the lead (concern)… the European
sovereign debt crisis has not gone away, there is some kind of deal
brewing but it is not clear what it will be.”

Bullard said that an improvement in the labour market and a clear
end to the deflation threat would be needed for the Fed to contemplate
hiking rates.

“For me, I want to be sure that inflation isn’t continuing to drift
lower so we have a deflation scenario … inflation expectations have
come up and I think that’s another factor. It’s really the performance
of the economy and the inflation outlook, that’s the two key concerns”.

“I think it is a positive sign that inflation expectations have
come up.

When the time came to tighten, the Fed could sell assets as part
of that policy tightening, Bullard said:

“I think that when the time comes to tighten policy a little bit,
we could some assets or we could let some assets run off the portfolio,”

The official envisaged a period of about 5 years over which the
Fed’s balance sheet would be normalised.

Bullard indicated that he was ready to back small, incremental
steps in policy in order to send a signal that the Fed is concerned
about the expansion of its balance sheet and about emerging inflation
pressures:

“I like subtle adjustments (in monetary policy) because I think
that’s the game we’re in and we do want to show that we’re concerned
about this (inflation/large balance sheet)”.

“Let’s do small increments as the news comes in on the economy and
make small adjustments,” he added.

–London Newsroom 4420 7862 7492 email: ukeditorial@marketnews.com

[TOPICS: M$U$$$,MMUFE$]