–Can Wait and See After QE2 on Unwinds

By Sheila Mullan

NEW YORK (MNI) – St. Louis Federal Reserve Pres. James Bullard
Wednesday night said that he has “worried about commodties as an asset
class” because they have become “an asset class in a way that they were
not even five to 10 years ago.”

“It’s easy to make bets,” now in commodities, said Bullard in
remarks to reporters after a speech to the NYU Money Marketeers Club of
New York.

Bullard said his speech would have addressed commodities price
increases but he lopped that part out as it did not seem to fit with the
rest of his theme. He had said the Fed should follow a headline
inflation mandate and stop emphasizing inflation’s core rate.

“But that phantom section would have talked about commodity prices
as asset prices, since commodities have become an asset class in a way
they were not even five to 10 years ago,” he said. Now, “it’s
easy to make bets.”

“What can we say about asset prices in price indexes?” he said. “We
do not put them in, we do not put stock indexes in a price index, in a
price measure that measures the prices for an average household.”

“But,” he continued, “I have worried aobut commoditeis as an asset
class” since “you get the other kinds of things that happen to asset
clasess,” such as that they are “very volatile” with movements that are
“hard to explain.”

When asked how long after QE2’s expiration at the end of June would
he like to see accommodative policy start to unwind, he said, “We can
afford to wait and see on the economy. I don’t see any reason why the
committee or anyone on it has to commit to a particular date.”

He continued, “I do think the next move will be some kind of
tightening. The simplest one to start with is just to allow the runoff
of the balance sheet.”

He said he “would be happy to see the first step be the runoff. I
am known for being more assertive about managing the balance sheet and
to sell assets, but I would also be happy to let it run off and to

Bullard also repeated what he said in his earlier speech, that he
said he thought the Fed “should name an explicit inflation target” along
with what price index that will be used and and its time horizon.

The Fed should specifiy “what will you do if you are not hitting
your target, etcetera. That is the things that the other central banks
have done. The Fed chairman has been an advocate of that. I’d like to
help him on that.”.

Bullard also was asked his opinion of a 1.5% to 2.0% personal
consumption expenditure price index-calibrated headline inflation target
over a periof of three to four years. “That would be one way to do it,”
he answered. That is part of the “the projections that we do every
quarter. And then the member puts out what they feel inflation is going
to be over the next five years. But I think we could do better than

“The Foreign central banks have done that,” he said. “They named an
explicit inflation target and they can” adjust it “but they have said
here is that goal.”

Earlier, in his speech, Bullard said that “U.S. monetary policy
needs to de-emphasize core inflation. Core inflation is not the ultimate
goal of monetary policy.”

“I think the best the FOMC can do is to use headline inflation when
looking at the price side of the dual mandate,” he said.

“The FOMC needs to get a better playbook on this question so that
the Committee can reconnect with American households, who see price
changes daily in many of the items the Committee seems to exclude from
consideration in making monetary policy,” he said.

“The U.S. focus on core inflation tends to damage Fed credibility,”
Bullard continued. “Many other central banks have solidified their
position on this question by adopting explicit, numerical inflation
targets in terms of headline inflation, thus keeping faith with their
citizens that they will work to keep headline inflation low and stable.
The Fed should do the same.”

–by Sheila Mullan, 212-669-6432

** Market News International New York Newsroom: 212-669-6430 **