By Steven K. Beckner

Asked about whether or not he supports announcing a price level
target as some have suggested in conjunction with QE2, Bullard responded
in the negative.

“I think at this point we would remain with our standard extended
period language,” he said, adding, “there are real questions about how
much we can strengthen the extended period language at this point.”

“Whether we can really operate even further into the future (with
zero rate communications) I don’t really know,” he said. “That’s why
it may be important to supplement zero interest rate policy with
quantitative easing.”

Bullard called price level targeting an “interesting” idea, but he
said “I think it would be too large a step at this juncture…” He said,
however, that he “would retain an open mind as a step we could take in
the future if we felt like existing policies weren’t producing
satisfactory results.” As for the efficacy of QE2, Bullard said, “I
think it’s pretty effective … . We’ve already seen a pretty substantial
decline in long-term yields … which I would attribute in part to
anticipation of Fed action.”

“I don’t see this neutrality argument that it’s not effective,”
he added.

But Bullard said he doesn’t want to “prejudge” the outcome of the
FOMC meeting. “It’s a bit of a tough call,” he said, because “we haven’t
seen a sharp negative shock” and “the data hasn’t gone one way or
another.”

He said the trendlessness of the data “will affect way the
committee thinks about the size and scope of the program.”

The fact that the economy is “wholly unsatisfactory,” as New York
Fed President William Dudley has said, “doesn’t tell you what optimal
policy should be,” said Bullard. “You have to assess the risks … .
Just observing the state of affairs not satisfactory is not a reason to
go ahead.”

As for warnings that the FOMC must go ahead with QE2 lest it
disappoint market expectations, Bullard objected sharply: “We’re not
here to ratify the markets. We’re here to choose optimal policy.”

Continuing to emphasize his openmindedness, Bullard said he
actually “kind of optimistic” about the Christmas shopping season and
said “there are reasons to be optimistic about 2011.” He also observed
that “the disinflation trend has flattened out in the last couple of
months.”

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** Market News International **

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