–Sees 3% Growth in 2012, Further Strength In 2013
–Does Not Support More QE, Prefers Buying Tsys, Not MBS

By Alyce Andres-Frantz

CHICAGO, Feb 6 (MNI) – St Louis Federal Reserve Bank President
James Bullard said Monday he was not in favor of the most recent Fed
language, anticipating low rates through 2014, and would have dissented
at the January FOMC if he had been a voting member.

Speaking to reporters after a speech to the Union League Club of
Chicago’s Public Affairs Committee on inflation targeting, Bullard said,
“I would not have supported 2014 language.”

And, he said, “I did not like 2013 language. Now think we are in
the game where we are going to have to change the date as the economic
situation changes. It’s not a good way to operate policy.

“I thought January (FOMC) meeting was a good chance of getting us
out of the box of having a date, but we did not do it.”

Bullard, a non-voting FOMC member, told the press he would have
dissented at the January FOMC if he had voting status.

In his personal contribution to the Fed’s expanded Summary of
Economic Projections, “I was in the range of 2013 being the first rate
hike,” Bullard said. In response to a question from the audience, he
said he predicts 3% growth in 2012 and further strengthening in 2013.

In removing accommodation, “you do not want to wait until
everything is exactly the way you would want it,” he said.

“It will take a while to move rates up,” Bullard said, adding that
even if the Fed tightens the Fed funds rate to 1% or 1.5%, that would
still be considered “very easy policy.”

Bullard also noted that raising the interest on excess reserves
could be a tool for tightening monetary policy. But, that must be done
“at the right time. It cannot be done right now.”

Bullard acknowledged that the better-than-expected January
employment report lessened the case for more quantitative easing.

“Unemployment has ticked down, that is welcomed news,” he said,
though it is “just one report but some of the past data was revised
better.” That is not to say that “8.3% is a good number but is better
than expected.”

Bullard told the audience that weekly unemployment claims remain
below 400,000, a level that is considered a long-term benchmark “that
usually means unemployment rate will continue to tick down.”

He said he expects unemployment will be below 8% by the end of the
year and that the unemployment rate is more important than the
participation rate.

“I am one that believes QE is a potent weapon and that it does have
an impact on the economy,” Bullard told the media. But purchasing more
assets for the Fed’s portfolio “means that we would be taking on more
risk with the balance sheet and delaying our exit.”

“For me, I think we should not do any further QE unless we see
further deterioration in the economy or a threat of deflation that is
rising more than it is today,” Bullard told the media.

If the above economic scenario was in place and more QE was needed,
“I would like to do it in a meeting-by-meeting approach because these
finite dates have really hurt us in the past.”

Earlier, responding to questions from the audience, Bullard said,
“lags in monetary policy often can be substantial,” often six to 18
months or longer.

With that in mind, it is conceivable that the QE2 operations that
the Fed undertook from November 2010 to June 2011, are just having their
effect right now, he said.

Bullard told the media that he preferred the Fed purchase
Treasuries rather than mortgage-backed securities. “If you buy
Treasuries it brings yields down and effects the whole market and that
is a better way to operate.”

He told the audience, he prefers Treasuries to MBS so as to not
favor one market over another. The Fed does “worry about disrupting
market function with our balance sheet policy.”

“In the last round of MBS purchases, I thought we started to
disrupt that market,” Bullard said.

On inflation, Bullard told the media, “I think that the Committee
deliberated for a long time over the past year to get some broad
(inflation targeting) language that everyone could accept.”

The current FOMC language “sort of acknowledges that we cannot
control some variables, but we can control inflation over the long run.”

“What inflation targeting does states a long run goal for the
central bank and takes the 1970 outcome off the table,” he said.

On output gaps, Bullard said, “I think it is overstated,
extrapolating off of very high peak. It is not a reasonable way to look
at it at least this time,” due to collapse in housing prices.

Bullard told the audience that “housing has hit a bottom,” and that
market has seen some slowed improvement, but that he does do not foresee
bubble levels on the horizon.

The recent housing crisis “has scared off a new generation of
homebuyers,” that ultimately forced an increase in the rental market.

–email: aandres@marketnews.com

** Market News International Chicago Bureau: (708) 784-1849 **

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