By Yali N’Diaye
WASHINGTON (MNI) – Expressing concern over a 2010 disinflationary
trend, St. Louis Federal Reserve President James Bullard Thursday
defended the central bank’s decision of additional quantitative easing,
noting that while the risks are “real,” they are outweighed by the
benefits.
In a prepared presentation for a meeting of the National Economists
Club, Bullard also noted that the dollar depreciation “is a normal
by-product of an easier monetary policy, provided all else is held
constant in the rest of the world.”
He also rejected the criticism that quantitative easing mitigates
the U.S. fiscal problem, as “QE has no impact on the longer-run fiscal
outlook for the U.S.,” which “remains very poor no matter what the Fed
does.”
In that regard, developments in Europe are an “important wake-up
call on how devastating it can be to leave long-run structural deficit
problems unaddressed.”
Bullard also reminded that the Fed has often stated its intention
to return the balance sheet to its pre-crisis levels, countering fears
the central bank is monetizing the debt.
Answering overall criticism that the additional quantitative
measures would not be effective, Bullard said in a presentation titled
‘The U.S. Economic Situation and Recent Monetary Policy Developments,’
that QE2 “Asset purchases can substitute for ordinary monetary policy,
and have had conventional financial market effects.”
He warned against judging the success of the policy by watching
nominal rates alone.
While QE2 does put downward pressure on nominal rates, “A
successful policy would generate somewhat faster economic growth and
somewhat higher real interest rates,” he said, as well as “somewhat
higher inflation expectations.”
Bullard expects QE2 impact on the real economy to peak with a 6-
to 12-month lag.
He also stressed the importance of “regular review clause” in QE2,
allowing the program “to be adjusted in response to incoming data in the
same way” interest rates adjust to a changing outlook for the economy.
Bullard also argued that the Federal Open Market Committee’s
decision to buy more Treasuries through the middle of 2011 was
warranted, given the worrisome 2010 disinflationary trend.
Keeping inflation close to the implicit target, he said, is
important for the FOMC’s credibility and to that effect, the U.S. should
strive to avoid further disinflation that could lead to a Japanese-style
experience.
In fact, “inflation targeting can be seen as the intellectual
descendant of commodity money standards,” Bullard said.
So he rejected the idea of using commodity money standards, arguing
that given the volatility of commodity prices in recent years, the
approach would be “problematic.”
** Market News International Washington Bureau: 202-371-2121 **
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