Fed should raise rates in 2013, Bullard says

CHICAGO – The Federal Reserve should start raising interest rates next year, a top Fed official said on Monday, arguing that many years of near-zero rates will do little to return economic output to pre-recession levels and risks causing “disaster.”

St. Louis Fed President James Bullard said he disagreed with the Fed’s decision last month to keep interest rates exceptionally low through late 2014 to bolster a recovery that was moving too slowly.

Bullard, who does not have a vote on the Fed’s policy-setting Federal Open Market Committee this year, is seen as a policy centrist.

“It’s important to start to remove accommodation — even when you go up to 1 percent or 1½ percent, that’s still very easy monetary policy,” Bullard told reporters. “It’s a matter of getting to a normal level of interest rates at the right time. I don’t think you want to wait until everything is exactly the way you’d expect it to be.”

Fed Chairman Ben Bernanke last month gave a bleak assessment of the economy and left the door open to new bond purchases to boost growth, a move that Bullard said he would support only if the economy worsened further and the threat of deflation re-emerged.

The Fed cut rates to near zero more than three years ago and has bought $2.3 trillion worth of bonds to spur economic activity.

Because the recession was brought on by a collapse in housing that destroyed household wealth, unemployment is likely to stay high and labor markets will improve only slowly even if rates are kept low for years, Bullard said.

Federal Reserve Bank’s Bullard says inflation targeting near: report

ST. LOUIS ― Central bankers are approaching a deal to set an explicit inflation target, a top Federal Reserve official said, part of a campaign to boost the economy by guiding expectations on interest rate policy.

“We are very close to having inflation targeting in the U.S.,” James Bullard, president of the St. Louis Federal Reserve Bank, told Bloomberg Radio in an interview on Thursday. A story of his remarks was posted to Bloomberg’s website on Friday.

“We are getting closer to being able to make a committee-wide statement about these longer-term policy goal issues,” Bullard said.

Since the 2007-2009 recession, the Fed has adopted new communication strategies to improve transparency and support growth by making clear that borrowing costs will be held low for an extended period.

Expectations of low interest rates can encourage investors to buy higher-yielding assets like company shares, providing the companies with more capital. Similarly, banks could be pushed to boost their own earnings by lending more money.

In the last four policy meetings, the Fed has said it will likely hold interest rates at ultra-low levels until at least mid-2013.

Minutes of its most recent meeting in December showed policymakers plan to begin publishing their forecasts for rates. It also showed they debated a statement on their longer-term goals and policy strategies. Officials are set to resume their discussion at their next policy meeting on Jan. 24-25.

Providing an explicit inflation target could help ease concerns that the Fed might take its eye off inflation in its effort to spur stronger growth. In addition, if inflation looks unlikely to breach the Fed target anytime soon, investors can count on the Fed holding open the monetary spigot.Individual forecasts from Fed policymakers have shown most aim to keep inflation in a 1.7 percent to 2 percent range, but an explicit target that they all agree on could give the public and financial markets a clearer prism to gauge how the central bank might respond to incoming data.

According to Bloomberg, Bullard said a Fed statement of longer-run goals “would name a target but it would also reiterate things we have said over the years about how keeping inflation low and stable contributes to great economic performance over all.”

Bullard: Fedederal Reserve will act if economy weakens further

ST. LOUIS ― The Federal Reserve will act if the economy weakens further and has the tools to do so, a top Fed official said on Friday.

St. Louis Fed President James Bullard said he expects the economy to grow modestly over the next year — though the sluggish pace leaves it vulnerable to shocks.

“Should economic performance deteriorate, monetary policy will respond,” Bullard said, according to slides of a presentation he was scheduled to make . “The Fed is not now, or ever, ‘out of ammunition’.”

With interest rates near zero, Bullard said, the Fed can support the economy through inflation and inflation expectations and asset purchases are a “potent tool.”

Dealers polled by Reuters earlier this month gave a median chance of 32 percent that the Fed will embark on a third round of quantitative easing.

The Fed said last week it plans to buy $400 billion of longer-term Treasuries and sell the same amount of shorter-term Treasuries by the end of June 2012, in an effort to lower longer-term borrowing costs.

It also said it would support the mortgage market by reinvesting principal payments from its mortgage-related debt into mortgage-backed securities.

Bullard said policy should aim to be more rules-based than it has been since the crisis hit and return to a meeting-by-meeting approach by the Federal Open Market Committee.

“The policy approach over the last several years, with announcements of large dollar amounts, fixed end dates, and rapidly changing tactics, seems fairly discretionary,” he said.

“Returning to a more rules-based approach may provide needed stability to the U.S. macroeconomy.”

Bullard repeated his view that promising to keep rates low for a specific period of time has a number of drawbacks, including the possibility of its hurting Fed credibility.

He also warned against tying monetary policy to the unemployment rate, as Chicago Fed President Charles Evans has suggested.

Unemployment rates have a “checkered history” in advanced economies over the last several decades, he said. In Europe over the last 30 years, for example, the unemployment rose and stayed high.

“If such an outcome happened in the U.S. and monetary policy was explicitly tied to unemployment outcomes, monetary policy could be pulled off course for a generation.”