–Five Years A ‘Reasonable’ Period To Normalize Fed Balance Sheet
–Confident On US, Global Recovery – Europe Only Question Mark

LONDON (MNI) – The Federal Reserve is “really nowhere near a
tightening” of monetary policy, St. Louis Fed President James Bullard
said here Tuesday tonight.

Speaking during a question and answer session at the European
Economic and Finance Centre, Bullard said that when the time came for
policy tightening, the Fed would have to strike the right balance
between “disorderly” and “too orderly” a tightening.

Referring to historical episodes, Bullard said the tightening of
policy in the early 1990s had been too disorderly but that the
tightening of policy in 2004 had been “maybe too orderly.”

Tightening would depend on incoming data and inflation, he
stressed. But he noted that inflation expectations remain “pretty tame”
right now.

In other comments, Bullard said that the bankers he is in contact
with remain “nervous about the recovery” and he conceded that there is
still a lot of anecdotal evidence suggesting businesses are still
finding it hard to get finance.

But he noted that indications are that banks are becoming more
“willing to lend”.

Bullard said the Fed’s quantitative easing programme had been “very
successful” and had lowered long-term yields and stabilized the housing
market.

Sooner or later the massive amount of QE done by the Fed would have
to be withdrawn. Whether the Fed’s QE proved inflationary will depend on
if it is perceived as a permanent or just a temporary addition to the
money base.

Unlike, other Fed officials, Bullard said that it would be a
“natural” way of tightening policy to take some of this QE stimulus back
rather than hiking short-term policy rates. The crisis had revealed that
the Fed had a lot more policy tools at its disposal than just short-term
rates.

Bullard said that he was “very hopeful” that a repeat of the
volatile inflation period of the 1970s could be avoided this time round.

The St. Louis Fed president rejected ideas that fiscal retrenchment
could or even should be avoided by governments at this point.

“Countries have got to live within their means,” Bullard said,
states could not continue to “rack up debt”.

Bullard said that the world’s most important central banks had made
the right decision in reopening swap lines in the wake of the peripheral
EMU crisis although he said that take-up so far had been “minimal”. But
the idea of the swap lines was a “back-up” and there were no limits on
how much could be provided if needed.

The Fed president was also pressed on the latest rise seen in
weekly unemployment insurance claims and he replied that he is
disappointed that these are going in the “wrong direction” – but he
added that the “more important” piece of data was non-farm payrolls
which had been “very strong”. The weekly claims data remains a volatile
series and it was only one week’s worth of data.

During comments to the press following the event, Bullard said five
years would be a “reasonable” length of time for unwinding the monetary
stimulus implemented by the Fed since the start of the crisis and
returning the balance sheet to a more normal level.

He reiterated that he would favour selling QE assets before raising
rates when the time come, although he conceded there were other official
points of view.

Events in EMU, he reiterated, would benefit the U.S. by potentially
keeping long-term rates low via safe-haven effects. While he conceded
that a stronger dollar would be a “mitigating factor” on that benign
outlook, trade with the euro zone was not so important for the U.S. as
Asia and Canada and Mexico — large US trade partners.

He downplayed the risk of deflation, saying that the US had “turned
the corner” on that and he sounded bullish on growth signs in the U.S.
and globally – “The only question mark is Europe,” he added said.

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

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