Fed's Bullard says QE3 was launched too soon

ST. LOUIS Tue Sep 18, 2012 7:42pm EDT

President and CEO of the Federal Reserve Bank of St. Louis James Bullard poses during an interview at the Federal Reserve Bank of St. Louis June 8, 2011. REUTERS/Peter Newcomb

President and CEO of the Federal Reserve Bank of St. Louis James Bullard poses during an interview at the Federal Reserve Bank of St. Louis June 8, 2011.

Credit: Reuters/Peter Newcomb

ST. LOUIS (Reuters) - The Federal Reserve should have waited for clearer signs of a flagging economy before launching its new bond-buying program, the head of the St. Louis regional Fed bank said on Tuesday, adding that he would have voted against it.

James Bullard, president of the St. Louis Fed, also told Reuters that he is sufficiently concerned about the risk of future inflation that he backs a controversial proposal by congressional Republicans for the Fed to return to having only a single mandate: preventing inflation.

The Fed currently has a dual focus on full employment and stable prices.

In discussing his views on more monetary stimulus, Bullard said, "We should take a little bit more (of a) wait-and-see posture." His comments, in an interview with Reuters Insider, highlight potential dissent on the Fed's policy committee next year when he will be a voting member.

The U.S. central bank launched a potentially massive policy-easing effort last week to try to help the struggling U.S. economy. Under the program, dubbed QE3 by Wall Street, the Fed will purchase $40 billion a month in mortgage-backed debt until the outlook for the labor market improves substantially.

Bullard said the state of the U.S. economy was not dire enough for such a program. Financial stress is pretty low and measures of inflation are right about on target, he said.

Equity markets also seemed to indicate a lot of faith in the U.S. economy, he said, saying he would have waited to see what actions were taken in Europe in the fall to fight the region's debt crisis.

"I would have voted against it based on the timing. I didn't feel like we had a good enough case to make a major move at this juncture," said Bullard, who has been viewed as a centrist on the spectrum of Fed officials, though in recent months he has sounded opinions that have sounded more hawkish as he has expressed doubts about the need for further stimulus.

Nevertheless, Bullard made clear he was concerned about the potential fallout on the United States from a global economic slowdown. "I just would have wanted to wait to see a little bit more about how that's going to develop," he said.

But he was not a fan of the European Central Bank's announcement that it would make unlimited purchases in euro zone government bond markets to ensure the common currency survives.

"I am concerned about the strategy. I think it has embroiled them (the ECB) in a political situation in Europe. ... I think this conditionality in exchange for bond purchases is a dangerous precedent for central banks around the world."

The U.S. central bank, which cut overnight interest rates to near zero in 2008, has already bought $2.3 trillion in government and mortgage-liked debt in a bid to drive other borrowing costs lower and spur a stronger recovery.

Last week's Fed action sparked an uproar among Republicans, who have complained for months the Fed was risking inflation through the unprecedented aggression of its actions. Bullard said he viewed inflation as under control, but said QE3 added to inflation risks.

"There is a global slowdown and normally you would think of containing U.S. inflation pressure. I do think we're at risk in the medium term and the longer term for inflation in the U.S., and we're taking more risk on for pursuing this policy," he said in a longer Reuters text interview after his remarks on Insider.

He also voiced concern that QE3 could spill over into higher commodity prices, as happened with the previous rounds of Fed bond-buying, although he said the soft tone of the world economy would help curb price rises.

Even so, Bullard said some of the contours of the plan, which has no set end date, were in keeping with how he thinks monetary policy should be conducted with interest rates already near zero. Leaving end dates off a bond buying program can make the policy "more effective," he said.

"We should go meeting by meeting with any balance sheet policy," Bullard said.

QE3 comes on top of an existing stimulus program in which the central bank buys about $45 billion a month in long-term Treasuries while selling the same amount of short-term Treasuries. That program, dubbed Operation Twist and designed to bring down long-term borrowing costs, runs to the end of 2012.

Bullard was not alone on Tuesday in voicing doubts over whether QE3 was needed. Dallas Fed President Richard Fisher, a noted inflation hawk, also said he would have voted against the policy if he were a voting member of the Fed's policy committee this year. Two other policymakers - William Dudley of the New York Fed and Charles Evans of the Chicago Fed - voiced strong support for the central bank's decision.

The Fed's statement in which it unveiled QE3 last Thursday sparked some controversy by saying monetary policy would likely be kept very easy until long after the economic recovery strengthens. This was seen as a signal policymakers would tolerate higher inflation, which some economists say could help the economy by goading spending and helping to slowly reduce the country's debt load.

Bullard said he was not in that camp. "I don't think there's a lot of benefit from inflation," he said.

In fact, he was worried enough about the prospect of inflation down the road that he backed a proposal from congressional Republican critics to curb the Fed's dual mandate of seeking low unemployment in the context of price stability for a solitary focus on preventing inflation.

"Anything that the Fed does is going to only have temporary effects," he said. "We have to get back to that notion. Too much is creeping in about the ideas of permanent trade-offs, which I regard as a misunderstanding of what monetary policy could do. So I would back going to a single mandate."

(Writing by Jason Lange; Editing by Leslie Adler)

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Comments (1)
drpalms wrote:
One of the first industries to feel the raw power of “emergency measures” was the home industry. During the early stages of inflation, people were applying their increasingly worthless dollars to pay down their mortgages. That was devastating to the lenders. They were being paid back in dollars that were worth only a fraction of the ones they had lent out. The banking crisis had caused the disappearance of savings and investment capital, so they were unable to issue new loans to replace the old. Besides, people were afraid to sell their homes under such chaotic times and, if they did, very few were willing to buy with interest rates that high. Old loans were being paid off, and new loans were not replacing them. The S&Ls, which in the 1980s had been in trouble because home prices were falling, now were going broke because prices were rising.
Congress applied the expected political fix by bailing them out and taking them over. But that did not stop the losses. It merely transferred them to the taxpayers. To put an end to the losses, Congress passed the Housing Fairness and Reform Act (HFRA). It converted all Bancor-denominated contracts to a new unit of value—called the “Fairness Value”— which is determined by the National Average Price Index (NAPI) on Fridays of the preceding week. This has nothing to do with interest rates. It relates to Bancor values. For the purpose of illustration, let us convert Bancors back to dollars. A $50,000 loan on Friday became a $920,000 loan on Monday. Few people could afford the payments. Thousands of angry voters stormed the Capitol building in protest. While the mob shouted obscenities outside, Congress hastily voted to declare a moratorium on all mortgage payments. By the end of the day, no one had to pay anything! The people returned to their homes with satisfaction and gratitude for their wise and generous leaders.
That was only an “emergency” measure to be handled on a more sound basis later on. Many months have now passed, and

Congress has not dared to tamper with the arrangement. The voters would throw them out of office if they tried. Millions of people have been living in their homes at no cost, except for county taxes, which were also beyond the ability of anyone to pay. Following the lead of Congress, the counties also declared a moratorium on their taxes—but not until the federal government agreed to make up their losses under terms of the newly passed Aid to Local Governments Act (ALGA).
Renters are now in the same position, because virtually all rental property has been nationalized, even that which had been totally paid for by their owners. Under HFRA, it is not “fair” for those who are buying their homes to have an advantage over those who are renting. Rent controls made it impossible for apartment owners to keep pace with the rising costs of maintenance and especially their rising taxes. Virtually all rental units have been seized by county governments for back taxes. And since the counties themselves are now dependent on the federal government for most of their revenue, their real estate has been transferred to federal agencies in return for federal aid.
All of this was pleasing to the voters who were gratified that their leaders were “doing something” to solve their problems. It gradually became clear, however, that the federal government was now the owner of all their homes and apartments. The reality is that people are living in them only at the pleasure of the government. They can be relocated to other quarters if that is what the government wants.

Sep 19, 2012 6:42pm EDT  --  Report as abuse
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