Fed's Bullard says QE3 was launched too soon

ST. LOUIS Tue Sep 18, 2012 8:09pm 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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