Bullard says economy no longer in deflation risk ...
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US deflation no longer seen as a risk
By Tom Braithwaite in Washington
The US has escaped the danger of a Japanese-style deflationary trap, according to James Bullard, a voting member of the Federal Reserveâs key policy-setting committee.
Mr Bullard, president of the Federal Reserve Bank of St Louis, told the Financial Times in an interview that his preoccupation throughout 2009 had been deflation, but the risk had âpassedâ.
Last weekâs Fed meeting produced a dissenting vote for the first time in a year when Thomas Hoenig, president of the Kansas City Fed and a rate hawk, argued that financial conditions no longer warranted a policy of holding rates at âexceptionally low levels . . . for an extended periodâ.
Other members of the Federal Open Markets Committee voted to preserve the âextended periodâ phrase, generally taken to mean near-zero interest rates will continue for at least six months. But they are also working on an exit strategy from the exceptionally loose policy used to fight the financial crisis.
Mr Bullard, who is considered a centrist member of the FOMC, said he was happy to continue with the current guidance, but he did have some sympathy for Mr Hoenigâs argument that âif you come off zero and you move up a little bit, itâs still a very easy policy. Youâve still got a very large balance sheet and youâre still at very low interest rates.â
He added that, although it was not time to tighten policy, members of the committee would weigh in their decisions factors other than inflation and unemployment. Factors to consider would include asset bubbles.
âI think theyâre gaining weight with many people because of the bad experience we had in the aftermath of the last recession, the housing bubble and how that really has blown up and caused so many problems,â he said.
When the Fed does come to raise rates it may have to switch from its traditional benchmark of targeting the federal funds rate to targeting a repurchase rate because of the upheaval in the two markets over the last two years.
âI think what the operating regime will really look like going forward is an open question and one that the committee is working on,â said Mr Bullard, who said the Fed could consider using interest it paid on reserves as the main rate but that it might prefer a market measure such as the repo rate.
One move that could be made before a change in the main interest rate â whichever the Fed decides to target â is an increase in the discount rate at which it lends to banks, which was kept unusually low as part of the central bankâs extraordinary package of measures to shore up the financial system and stimulate lending.
Mr Bullard emphasised that an end to the unusually low spread of 25 basis points between the discount rate and the interest rate paid on reserves held at the Fed should not be seen as an immediate precursor to a general tightening of monetary policy.
âI think it makes sense today to think about it in terms of a liquidity context,â he said. âThe reason itâs so low is exactly because weâre trying to address a huge crisis and a very special situation.â
The broader post-crisis economy was âon trackâ with its recovery, he said. âItâs not a real strong recovery but thatâs what we had predicted anyway. But it will be above-average growth for the first half of 2010 and weâll probably see some positive jobs growth in the first part of 2010 here.â
He âhopedâ that improvement in the labour market would come in the first quarter.
Following harsh criticism of Ben Bernanke in the Senate ahead of his reconfirmation as Fed chairman last week, Mr Bullard warned that political interference with the Fed would be dangerous and he strongly opposed plans to strip banking supervision from the central bankâs roster of duties.
âI think itâs dangerous for America and dangerous for a global economy to try to divorce this central bank from true understanding of financial markets, and I think that thatâs the direction weâll be going in if we separated out the central bank from regulation,â he said.
âWhat this crisis has shown is that our understanding of financial mediation and how it can impact on macro economy was not good enough. So what you want is to force the central bank to get better understanding and more information about financial markets as theyâre making monetary policy decisions.â
Asked about congressional proposals to impose sweeping audits of the Fed, Mr Bullard said he was open to ideas that would increase transparency, but only if they did not lead to politicisation of Fed decision-making.
