By Steven K. Beckner
ST. LOUIS (MNI) – St. Louis Federal Reserve Bank President James
Bullard Tuesday expressed strong reservations about using Fed
communication policy as a monetary easing tool and particularly objected
to tying the federal funds rate to any kind of unemployment trigger.
Bullard, echoing many of the comments he made in a Monday MNI
interview as he spoke to the CFA Society of St. Louis, doubted whether
announcing that the Fed will keep the federal funds rate near zero for a
long period would be “credible.” Such an announcement may well “fall
flat,” he said.
If the Fed’s policymaking Federal Open Market Committee should
decide it needs to do more easing, then asset purchases are a “potent
tool,” he said. But he warned it “must be used “carefully.”
“Increases in the size of the balance sheet entail additional
inflationary risks if accommodation is not removed at an appropriate
pace,” he cautioned.
And he reiterated that, rather than doing asset purchases in large,
pre-announced amounts, the FOMC should decide “meeting by meeting” how
much to buy.
At a time when Fed Chairman Ben Bernanke is musing about using
communication as an easing tool and Vice Chairman Janet Yellen is
chairing a task force studying how to improve Fed communication,
Bullard expressed a good deal of skepticism about changing the FOMC’s
“forward guidance” to convey that the Fed will keep the funds rate near
zero until certain statistical boundaries have been reached.
He offered a number of caveats, as he had in the MNI interview:
“One is that it is not clear how credible actual announcements can
be,” he said. “If the economy is actually performing quite well at the
point in the future where the promise begins to bite, then the Committee
may simply abandon the promise and return to normal policy.”
“But this behavior, if understood by markets, would cancel out the
initial effects of the promise, and so nothing would be accomplished by
making the initial promise,” he said. “A non-credible announcement would
simply fall flat.”
Some, such as Chicago Fed President Charles Evans, have proposed
that the FOMC should delay tightening until the unemployment rate has
fallen to a certain level and/or if inflation has risen to a certain
level. But Bullard suggested that would be a dangerous approach.
“Tying monetary policy directly to the level of unemployment is
unwise,” he said.
Bullard said “most proposals use an actual unemployment rate but an
anticipated inflation rate,” and he said “this asymmetry is hard to
justify.”
He also observed that “unemployment rates have a checkered history
in advanced economies over the last several decades” and noted that
“hysteresis” has been “a common problem — unemployment rises and simply
stays high.”
“If such an outcome happened in the U.S. and monetary policy was
tied to a numerical unemployment outcome, monetary policy could be
pulled off course for a generation,” he warned.
Bullard indicated he does not think monetary policy needs to be
eased further at this point, though he didn’t rule it out in the future.
He said the U.S. economy “avoided the recession scare of August,”
but noted the FOMC has cited “substantial downside risks” stemming from
Europe.
He said Europe is “too distant” to greatly influence consumer and
business behavior and projected continued moderate economic growth.
Should the European debt crisis worsen, he said the Fed can
reopen the liquidity facilities its used during the mortgage crisis.
Bullard observed that inflation and inflation expectations rose
during the last year, even though many measures of economic performance
indicate that the economy was relatively weak. “With the policy rate at
zero, this means real short-term rates have declined,” he said.
** Market News International **
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