–FOMC Has Already Provided Aggressive Monetary Policy
–Should Not Attach Fixed End-Date If Fed Decides To Ease More
–Any Future Policy Path Should Be ‘State Contingent’

By Brai Odion-Esene

WASHINGTON (MNI) – St. Louis Federal Reserve President James
Bullard late Monday emphasized that the officials at the central bank
have yet to decide on whether more action is needed to support the
sluggish U.S. economic recovery, noting that the Fed has already
implemented an aggressive monetary policy.

The Fed’s policymaking Federal Open Market Committee meets
September 20-21, and “I have little doubt that, as always, an intense
and spirited discussion about the course of future monetary policy will
occur,” Bullard said in opening remarks at the St Louis Fed’s “Dialogue
with the Fed: Beyond Today’s Financial Headlines.”

The growing belief in the financial markets and among many
economists is that the dismal August jobs data made it increasingly
likely the FOMC will announce another round of quantitative easing after
it meets, but Bullard cautioned against this assumption.

“Let me stress that no decision has been made on this difficult
question,” he said.

While the stall in jobs creation has increased worry that the U.S.
is heading towards another recession, Bullard said he thinks the most
likely path for the economy going forward “is one of modest, albeit
unspectacular, growth and that the chances of recession are only
modestly higher than they were earlier this year.”

“And, while disappointing economic performance certainly makes the
case for an aggressive monetary policy, the FOMC has in fact provided
that aggressive policy,” he added.

Bullard, who serves as a bellwether of the majority thinking on the
FOMC, noted that the Fed’s near-zero rate policy — in place since
December 2008 — has been supplemented with the additional promise to
keep the rate near zero at least through the middle of 2013, almost two
more years.

In addition, the Fed’s balance sheet has been expanded to an
unprecedented size through the outright purchase of agency
mortgage-backed securities and Treasury securities, with newly-created
base money.

“In sum, the stance of monetary policy has been appropriately
calibrated to try to meet, as best we can, the unusual macroeconomic
circumstances,” Bullard said.

Should the FOMC decide more easing is needed, Bullard said he
believes it is time for the Committee to discard “one-time policy
changes with fixed end dates. The Committee in the past never
contemplated announcing several hundred basis point moves to be
completed at a date certain. Yet that is how the Committee behaves
today.”

When the FOMC announced its $600 billion large-scale asset purchase
plan late last year, it made clear the program would end by the second
quarter of 2011 and not be extended. Many believed the end date should
have been left open in case economic conditions had not sufficiently
improved.

“Research indicates quite clearly that optimal monetary policy
should continuously respond to ever-changing economic conditions,”
Bullard argued. “As the federal funds rate was set meeting-by-meeting
before December 2008, so any future policy path should be
state-contingent and not of premeditated size or duration.”

In addition, he said any policy path should be reviewed carefully
and seriously at each meeting for possible adjustment given the incoming
data.

“In short, optimal monetary policy is not a one-time action or
event, but a rule that takes the state of the economy and maps it into a
setting for a policy instrument,” Bullard said.

He added that to the extent the FOMC can return to this principle,
“monetary policy will come closer to delivering the best outcomes that
can be achieved through this channel.”

Much has been made of the three dissents against the FOMC’s
decision to promise that interest rates will remain at exceptionally low
levels until mid-2013, but Bullard sought to downplay its significance.

“Those of us who sit on the Committee have a wide-ranging
collection of viewpoints, but I consider that a strength. It’s exactly
this diversity that helps us make the best monetary policy decisions for
America,” he said.

** Market News International Washington Bureau: 202-371-2121 **

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