By Steven K. Beckner

ST. LOUIS (MNI) – St. Louis Federal Reserve Bank President James
Bullard said Thursday that he wants to see more data before deciding
whether or not to support a resumption of quantitative easing at the
Fed’s early November monetary policy meeting, but said that if the
Federal Open Market Committee does approve “QE2″ he would like to see it
announce $100 billion in long-term Treasury security purchases between
FOMC meetings.

Bullard, a voting member of the FOMC, said that the FOMC should
then proceed meeting by meeting in a “disciplined” and “flexible” way to
assess whether and how much further asset purchases are needed. And he
said the Fed should not set itself a purchase limit but rather should
leave the amount “open-ended.”

Bullard, talking to reporters on the sidelines of a St. Louis Fed
conference, said the FOMC could provide “forward guidance” on whether or
not further quantitative easing was likely to be necessary based on its
latest assessments of the forecast for economic growth and inflation.

He likened his suggested approach to the way the FOMC conducts
conventional policy, in which it moves the federal funds rate up or down
in increments of 25 basis points and doesn’t pre-announce how far the it
will take rates in any direction.

Bullard said he believes quantitative easing would be effective in
lowering interest rates and said that, indeed, the mere anticipation of
QE2 has been effective in lowering long-term interest rates.

However, he said QE2 is still “a tough call” in his mind.

Looking forward to the Nov. 2-3 FOMC meeting, Bullard called it “an
important one” in which he and his colleagues must go through the
“important exercise” of revising their quarterly, three-year forecast.

“A key part of that updating is the outlook for 2011,” he said. “So
we will have to assess that.”

He said he has not yet made his own forecast, saying he wants to
“wait for the last minute to get the most data I possibly can.”

“One key report that has yet to come in is the third quarter GDP
report,” he noted, adding that “it may come in a little stronger than
the second quarter.” So he said “we have to keep our eye on that.”

Bullard said he will “wait until all the data comes in” before
deciding whether QE2 is needed.

“No decisions have been made, and no decision will be made until
the November meeting and we have a chance to hash it out there,” he
said.

“If we do decide to go ahead with quantitative easing,” Bullard
outlined “a good program we could adopt.”

He said the FOMC “could think in terms of units of $100 billion (of
purchases) between meetings” and “think about the level of the
balance sheet as being the operative part of this policy, so if you
decide to purchase $100 billion more what you’re saying is you’re going
to increase the size of the balance sheet by $100 billion … all in
longer date Treasuries.”

Bullard said the FOMC “could give forward guidance” on “how likely
it is that we continue these purchases in the next meeting.”

“By extension that would set up a whole path of purchases for the
future.”

Asked whether the FOMC should set a maximum amount of intended
purchases, as some officials have implied, Bullard replied, “I think for
now you’d just leave it open ended. I think that would work just
fine.”

Again likening it to funds rate policy, Bullard observed, “when we
do interest rates … (and) you embark on an interest rate tightening
and you go up 25 basis points you don’t name an end point.”

Fed watchers “could extrapolate and say they’re going to go all the
way to 20%,” he said, but in practice that’s not what happens.

Kansas City Fed President Thomas Hoenig, a fellow FOMC voter, has
warned that once it embarks on QE2, the FOMC could find itself buying
more and more securities and pumping more and more excess reserves into
the banking system in order to achieve an effect — leaving itself with
a much larger balance sheet from which to eventually exit.

Asked by MNI whether that is a legitimate concern, Bullard replied
that if the Fed were to act in the way Hoenig describes “that’s a
danger” and “would create an unstable situation.” But he said, “I don’t
think it’s a danger the way I’m describing it.”

“There are important lags in monetary policy,” he said, and it’s
“exactly the same with quantitative easing … . I don’t think you should
try to do it all at once.”

What he is advocating is a “disciplined” and “flexible” approach,
in which the FOMC would review Q.E. at each meeting. “The committee
could have a chance to look at new data” and “assess the progress of the
economic recovery and inflation.”

He said “the assessment would be made in qualitative form” in “the
tradition of the committee…” He said that the FOMC “wouldn’t put
specific (growth, unemployment or inflation) numbers in the
statement.” but “do it qualitatively and make a judgment.”

“If you do it that way it would give the committee the ability to
pause” and either decrease or increase the amounts” of asset purchases
depending on how the economy was evolving relative to the forecast.

“This is the kind of flexibility the Committee needs to get the
best monetary policy we can possibly have.”

“The size could be left open-ended” with “no ultimate amount…,”
he said. The FOMC would “just start on this path…(and) not have any
complete commitment about the ultimate size of the program…”

“Naming the size” of Q.E. up front would be “inconsistent with
state contingency,” he said, referring to a policy which would be
contingent on the state of the economy.

Even without an ultimate amount, Bullard said “nevertheless markets
would immediately have an idea … what the committee is going to do
based on how they think the economy is going to evolve and how inflation
going to evolve.”

Q.E. should be “all based on economic performance rather than be
named up front,” he asserted.

Bullard said “the best part about this in my view is that it’s the
best analogy to how we’ve managed policy in the past with respect to
interest rates. When we move interest rates, we do it in small
increments of 25 basis points usually. … Those small increments are
not that consequential in themselves … but that path has powerful
effects on the economy.”

“When we tighten we don’t say we think it’s going to be 300 basis
points eventually,” he said. “We assess at each meeting … . That has
worked pretty well in the past” and “markets have stayed in pretty close
synchronization” with the Fed.

After initially announcing that the FOMC plans to buy $100 billion
between now and the next meeting, “we’d just say we’re going to review
further purchases based on our qualitative assessment of the recovery
and progress toward our inflation target.”

“We just say we’ll re-assess.”

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