–Economic Outlook Improved Since QE Program Announced
–Countries With Fixed FX Rates ‘Choosing to Import’ US Mon Pol

By Heather Scott

WASHINGTON (MNI) – St. Louis Federal Reserve Bank President James
Bullard said Thursday the Fed’s quantitative easing was “classic” policy
easing that caused a normal reaction in financial markets and has seen
an improved economic outlook since it was announced.

Bullard also argued that there are difficulties with using global
output gaps to measure inflation pressures, since the results can be
contradictory. And while critics say the Fed is exporting inflation, he
said instead countries with managed exchange rates are importing U.S.
monetary policy.

In a presentation prepared for the Bowling Green Area Chamber of
Commerce Coffee Hour in Kentucky, Bullard said, “Quantitative easing has
been an effective tool, even while the policy rate is near zero.”

Prior to announcing the program “monetary policy was ultra-easy,”
he said, and noted that the “Japanese experience with mild deflation and
a near-zero nominal interest rate has been poor.”

“The economic outlook has improved since the program was
announced,” Bullard said, referring to the November announcement of the
second round of quantitative easing.

In addition, he said, “The financial market effects were entirely
conventional.”

Bullard noted that “The policy change was largely priced into
markets ahead of the November FOMC meeting.” And following the
announcement, “real interest rates declined, inflation expectations
rose, the dollar depreciated, and equity prices rose.

“These are the ‘classic’ financial market effects one might observe
when the Fed eases monetary policy in ordinary times (that is, in an
interest rate targeting environment),” he said.

“Asset purchases can substitute for ordinary (interest rate
targeting) monetary policy,” he said, but added, “The natural debate now
is whether to complete the program, or to taper off to a somewhat lower
level of asset purchases.”

Weighing in on what he called another “hot topic,” Bullard said
“Critics suggest the Fed is encouraging inflation globally. This despite
the fact that U.S. inflation is relatively low.

“This may imply the Fed is not weighing global conditions
appropriately,” he said. “The Fed is charged with controlling U.S.
inflation, but perhaps global inflation will drive U.S. prices higher or
cause other problems.”

However, Bullard argued, “Inflation is a threat especially for
countries with quasi-fixed exchange rates with the dollar. Many
countries prefer to manage their dollar exchange rate. Those countries
are choosing to import U.S. monetary policy to some extent.”

On the debate over whether the Fed should take a global output gap
into account to gauge inflation pressures, Bullard noted the problems
with this measure, since emerging market economies and advanced
economies are moving in different directions.

“The advanced economy gap is negative, but the emerging markets gap
is positive. The weighted average of the two is positive. This may
suggest upward, not downward pressure on inflation from this source,”
he said.

He noted “acute” issues in measuring the global output game, and
said “Empirical relationships between gaps and inflation are shaky.”

Bullard also rejected the possibility of the central bank using
commodity standards, and said “Inflation targeting is a better choice in
the current environment.”

“Inflation targeting is the appropriate modern alternative to
historical commodity standards,” he said.

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

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