–Adds Comments On Fed’s QE2 And On Policy Normalization

PRAGUE (MNI) – The U.S. Federal Reserve Bank could begin to
normalize monetary policy even amid great global uncertainty, the
president of the St. Louis Fed, James Bullard, suggested Tuesday.

“The exit strategy was widely discussed in 2010, and that debate
will likely revive during 2011,” Bullard said in panel discussion at the
19th European Banking and Financial Forum here, according to a summary
of remarks released in advance.

“Discussion of the normalization of U.S. policy will likely return
as the key issue in 2011,” he added. Noting the improved U.S. economic
outlook since quantitative easing II was implemented, Bullard said, “the
natural debate is how and when the exit should begin.”

“However, additional uncertainty has clouded this picture,” he

“In recent weeks, macroeconomic uncertainty has been on the rise
from four key sources,” Bullard said, citing turmoil in the Middle East
and North Africa and the associated uncertainty premium in oil prices;
the natural disaster and the damaged nuclear reactors in Japan;
continued uncertainty regarding resolution of the European sovereign
debt crisis; and the U.S. fiscal situation and possibility of a
government shutdown.

Bullard argued that all four situations have the potential to
escalate. If escalation occurs, how and when to begin normalizing
monetary policy would become less clear, he said.

“Still, the most likely prospect is that all four are resolved
without becoming global macroeconomic shocks,” he said.

“The FOMC may not be willing or able to wait until all global
uncertainties are resolved to begin normalizing policy,” Bullard
ventured, noting that even once it begins, the process of normalization
would “still leave unprecedented policy accommodation on the table.”

Compared to last summer, U.S. growth prospects have improved,
Bullard observed. “Private sector forecasters and the FOMC all marked up
their forecasts,” he said.

“Anecdotal reports were more bullish,” showing “profitable
businesses with considerable cash and an improving outlook,” he said.
“An improving economy 18 months post-recession is generally a strong

Bullard explained how the Fed’s second round of quantitative easing
was “a classic easing of monetary policy” and “an effective tool, even
while the policy rate is near zero.” Even before the launch of QE2 in
November, monetary policy was ultra-accommodative, he said, noting that
the policy rate had been near zero for an “extended period” and that the
Fed’s balance sheet was much larger than it had been before the crisis.

Policy normalization will take time, Bullard said, noting that it
is the most difficult part of the business cycle for a central bank.

The process has two parts, he explained: “QE accommodation is
removed by returning the balance sheet to an ordinary size over time,”
and “the policy rate begins to approach levels associated with moderate

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