Wansca » Fed’s Monetary Policy Is Effective Even With Rates Near Zero, Bullard Says

Fed’s Monetary Policy Is Effective Even With Rates Near Zero, Bullard Says

January 21st, 2012

Federal Reserve Bank of St. Louis
President James Bullard said monetary policy has influenced
inflation and price expectations, even with the benchmark
interest rate near zero since December 2008.

“Stabilization policy should be left to the monetary
authority, which can operate effectively” with interest rates
near zero, Bullard said today in a speech in Chicago. By
contrast, the use of tax and spending changes to respond to
shocks in the economy over the short run “has run its course.”

Fed officials are divided over whether the central bank
should wait to see if the economy deteriorates before taking
additional steps to try cutting borrowing costs and boosting job
creation. The US economy is growing moderately amid “apparent
slowing” in global growth, with “some improvement in overall
labor market conditions,” Fed officials said last month. The
economy gained 200,000 payroll jobs in December and the
unemployment rate fell to 8.5 percent from 8.7 percent in
November, figures from the Labor Department showed yesterday.

“The turn toward fiscal approaches to stabilization has
run its course,” Bullard said in the text of slides prepared
for a speech to the Korea-America Economic Association. “Tax
and spending policy should be set for the medium and longer
term.”

Bullard, 50, who doesn’t vote on monetary policy this year,
was the first Fed official in 2010 to call for a second round of
asset purchases. He published a paper in 2010 entitled “Seven
Faces of the Peril,” which called on the Fed (FDTR) to avert deflation
by purchasing Treasury notes, a policy known as quantitative
easing.

Bank President

Bullard joined the St. Louis Fed’s research department in
1990 and became president of the regional bank in 2008. His
district includes all of Arkansas and parts of Illinois,
Indiana, Kentucky, Mississippi, Missouri and Tennessee.

The US consumer-price index increased 3.4 percent in the
12 months ended November, the smallest year-over-year increase
since April, a Labor Department report Dec. 16 showed. Excluding
volatile food and energy, the core CPI climbed 2.2 percent from
November 2010, the most since October 2008.

The Fed’s preferred price gauge, the Commerce Department’s
measure that excludes food and fuel and is tied to consumer
spending, was up 1.7 percent in the year ended in November, at
the lower end of Fed policy makers’ long-run projection of 1.7
percent to 2 percent.

To contact the reporters on this story:
Vivien Lou Chen in San Francisco at
vchen1@bloomberg.net;
Meera Louis in Washington at
mlouis1@bloomberg.net

To contact the editor responsible for this story:
Chris Wellisz at
cwellisz@bloomberg.net