–Adds Detail, Quotes To Version Transmitted At 1153 GMT
–Bullard: Not Obvious We Have To Do A Lot Right Now; Could Wait and See
–Bullard: Makes Case For Doing QE “In Small Amounts”

LONDON (MNI) – The decision over relaunching quantitative easing at
the Fed’s November meeting is a “tough call”, and things can change
between now and then, James Bullard, president and CEO of the Federal
Reserve Bank of St. Louis, said in a CNBC interview.

Bullard said extra QE was “not a slam dunk”, in basketball
terminology, and the Fed members still had to rework their forecasts
before the November meeting. He said the FOMC could take the view it
would postpone a decision on more QE until December or January.

Bullard described more QE as a “tough call” and asked to amplify on
this view said “I think it is. Just trying to be as clear as I can be
about it.”

The markets are currently attaching a high probability to further
QE in November, but Bullard injected a note of caution.

“We have got some time between now and the meeting. Things can
happen, data comes in. All of us have to redo our forecasts, including
me, I haven’t done it yet,” he said.

Bullard acknowledged that there was a risk the Fed could overdo it
with QE and that there was a risk it could reignite inflation.

“This is unchartered waters… (inflation) may get away from us if
we are not careful,” he said.

“It (more QE) is a tough call because we did hit this soft patch in
the economy but it is not so soft that it is obvious that we have to do
a lot right now,” Bullard said.

“It is still possible to make the case that the economy will
improve naturally on its own in 2011 and that we’ll have faster growth
and that we’ll get inflation closer to target in 2011 without taking all
these risks that come with expanding the balance sheet further,” Bullard
added.

Bullard said if the FOMC took the view the economy could improve
unassisted, it could effectively postpone a decision on QE.

“The natural thing for the Committee to do if it felt that way
would be just to say ‘Well, we’ll just wait until the December meeting
or we’ll wait until January until we have more data on the economy.” he
said.

“That is a common thing the committee might do,” he added.

Presented with data highlighting the impact of the financial crisis
on the US, Bullard said “We know after a financial crisis it takes a
long time to recover.”

“Just looking at these numbers alone I don’t think is enough to say
that the case is a slam dunk for additional quantitative easing,”
Bullard said.

Bullard made the case for more QE in terms of balance of risks
rather than current economic weakness, and said it would prevent
deflation.

“I have made other arguments in terms of a risk management approach
where you don’t want to get into a Japanese style situation,” Bullard
said.

“Preventing deflation – I think QE2 will do that,” Bullard said.

“I am in the camp where what we want to do is avoid a deflationary
scenario. That is one of the key things,” Bullard added.

QE would not be able to solve all the US’ economic woes, the St.
Louis Fed head added.

Asked about QE weakening the dollar, Bullard said dollar policy was
a matter for the Treasury, not the Fed.

“The debate inside the Fed … does not talk in these (dollar FX
rate) terms ever,” he said.

Bullard Scorns USD6 Trillion QE Case; Backs Small QE Amounts

Bullard poured scorn on the view that in order to have the effect
it wants the Fed would have to carry out a vast amount of QE, ‘say some’
USD6-7 trillion, rather than the relatively small amounts it could
sanction.

The case for USD6-7 trillion is “just ridiculous” Bullard said.

“You are going to buy the whole outstanding Treasury debt? That is
crazy,” Bullard said.

Bullard said “a better number to think about” for the scale of QE
was the monthly Treasury issue of “for round numbers, let’s say $100
billion a month right now – which is a lot.”

“Do you want the Fed buying the entire new issue ? I think that is
kind of a question,” Bullard said.

“At a USD100 billion a month you are going to get to several
hundred billion or more,” Bullard said.

“The way I would do it (QE) is small amounts and then make a
decision at the next meeting and that would set up expectations,” he
said.

“Then if the economy improves and things start to go better then
you can slow down or stop or even if things really start to perk up you
can sell off,” Bullard said.

Bullard Opposes Point Inflation Target

Bullard was asked about reports the Fed is looking at switching to
a single point inflation target. He expressed skepticism about the idea
saying any single inflation measure, such as CPI, had its quirks and
flaws.

The academic literature supports a point target but that is
something that may work better in theory than practice.

Inside the economic models “it works better to say something really
specific (on inflation), but inside the models the numbers are all
exactly right, there is no amibiguity about what the different things
are measuring,” he said.

“When you come back as a policymaker you don’t want to implement
that one (a point target),” he said.

Bullard played down the idea that the Fed could deploy a ‘shock and
awe’ approach to QE, saying what was needed were relatively small policy
adjustment contingent on data developments:

“I’ve been perfectly clear that I want a state-contingent program,
you need to look at the data and evaluate just as you would with
interest rate decisions.”

“The days of shock and awe have passed,” Bullard said.

“There has been a disinflation trend in 2010, but the reason why it
is a bit of a close call is that things have kind of flattened out in
recent months, the data has changed some, it has flattened out some, and
you’ve got projections that 2011 will be stronger, it was just a soft
patch and 2011 will be stronger, so it’s very reasonable to think that
maybe you don’t need to do very much, it’s possible”.

–London Bureau; Tel: +44207 862 7491; email: drobinson@marketnews.com
dthomas@marketnews.com

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