Fed's Bullard warns inflation cannot ease US debt burden

MEMPHIS Thu Oct 4, 2012 8:43pm EDT

MEMPHIS Oct 4 (Reuters) - The United States faces a problem of too much debt, but any suggestion that this burden can be eased by allowing inflation to rise will just result in higher borrowing costs in the future, a senior Federal Reserve official said on Thursday.

James Bullard, president of the Federal Reserve Bank of St. Louis, said that inflation was sometimes seen as a way to "partially default" on existing debts, because it lowers the amount the borrower repays in real, inflation-adjusted terms.

"A partial default today through higher inflation would be paid for via higher inflation premiums in future borrowing. Creditors would want to protect themselves against an unpredictable central bank," he told the Economic Club of Memphis in prepared remarks. "Alas, in economics there is no free lunch."

Bullard is not a voting member of the Fed's policy-setting committee this year, but will hold a rotating vote in 2013.

He has publicly stated that he would not have voted for the Fed's third round of so-called quantitative easing announced at its policy meeting last month, at which it also committed to holding interest rates near zero until at least mid-2015.

"Is this happening? Distant inflation expectations from the TIPS (Treasury inflation protected securities) market seem to suggest that investors do not completely trust the Fed to deliver on its 2 percent inflation target," he said.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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