–Markets Have Got Operation Twist Wrong
–2014 Date Likely To Shift As We Get Closer
–ECB LTRO Only Buys Time For EU Govts; Initial Impact Fading

By Yali N’Diaye and Ian McKendry

WASHINGTON (MNI) – While the Federal Reserve’s monetary policy has
been “appropriately easy,” St. Louis Fed President James Bullard
Wednesday warned against keeping it that way for too long.

In an interview on Bloomberg Radio, Bullard also said the markets
have misinterpreted ‘Operation Twist’ and that the Fed has already taken
steps to accomodate beyond the program’s expiration.

“The markets have this twist thing wrong,” Bullard said.

“They’ve got the idea that twist is going to expire so they are
talking a lot about what is going to replace twist, but the Committee
has already done something else, and the something else is putting in
the calendar date of the first tightening,” he argued.

Bullard added that the Federal Open Market Committee already moved
the date of the first tightening out to late-2014 in the January
meeting.

That being said, Bullard expects the FOMC’s pledge of extremely low
policy rates through late 2014 to shift as “we get closer to 2014.”

“I think it will because the outlook will change,” he said. “I
would not be reluctant to revise it because in my view this is just a
statement on what the most likely outcome is given the information we
have right now.”

Bullard also indicated he is unlikely to change his forecast
regarding his expectation of an increase in the Fed Fund rates by
late-2013.

With regard to employment, Bullard reaffirmed that monetary policy
is not the appropriate tool to address the issue.

Expecting the unemployment rate to continue to tick down as long as
the economy remains in expansionary more, even modestly so, he said “I
don’t think we can really speed that up very much by, say, committing to
stay at zero for a long time.”

“I think unemployment will continue to tick down this year as it
has,” he predicted, and only a labor market policy is more likely to be
successful at addressing unemployment.

Overall, Bullard said that “Monetary policy has been appropriately
easy, ultra easy.” He added, however, “you don’t want to overstay our
welcome on this ultra easy policy.”

He expressed concerns over “committing to the ultra easy policy
over the next couple of years.”

“That’s exactly the time when you’d expect the economy to come
around and turn in a better performance and we’d like to be able to have
the option of taking a lot of this liquidity off the table when that
time comes,” he warned.

For now, he repeated the need to pause and get more data before
deciding on “where you are going next.”

On the inflation front, he pointed out that while it is currently
low and has been moderating, “it is above our inflation target when
measured from one year ago by either headline CPI inflation or headline
PCE inflation.”

In addition, the Fed is “taking a lot of inflation risk by having a
large balance sheet,” and “by having interest rates at zero for a long
time.”

He also down played the impact of higher oil prices on the U.S.
economy, arguing that “the U.S. economy is more energy efficient than
people realize,” and as a result is “less vulnerable to oil shocks than
it was in the 1970’s.”

“That goes in our favor.”

Turning to Europe, the central banker said EMU governments have
borrowed too much and now have no other option than fiscal austerity.

While the European Central bank’s long term refinancing operation
(LTRO) “has been a successful program,” he said, “all that LTRO can do
is buy time for governments” to take the steps to consolidate their
fiscal positions.

Besides, its “initial impact is probably wearing off at this
point.”

Bullard also said there is no way around fiscal consolidation.

EMU countries just “don’t have an option to borrow more,” he said.
“They are at the end of the rope and their only option is austerity and
getting their fiscal situation in order.”

** MNI Washington Bureau: 202-371-2121 **

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