NEW YORK As conditions in U.S. credit markets return to normal, a policy of near-zero interest rates will be increasingly difficult to defend in light of the burden it puts on savers, a top Fed official said on Thursday.
"The policy of the (Fed) has been that, on balance, low real yields will help repair the damage from the crisis more quickly, and I have largely sided with the (Fed's policy-setting) committee in this judgment," St. Louis Fed President James Bullard said in remarks to prepared for delivery to the Council on Foreign Relations in New York City. "As time passes, however, it becomes more and more difficult to argue that credit markets remain in a state of disrepair, and thus harder and harder to justify continued low real rates."
In a speech largely focused on the effects of current monetary policy on income and wealth inequality in the United States, Bullard delivered a strong defense of the Fed's bond-buying programs, which he said have helped reduce borrowing costs and boost stock prices without making U.S. income or wealth inequality any worse.
The Fed is on track to wind-down its current such program of quantitative easing over the next several months. Because equity prices plunged during the crisis and have only recently climbed back to standard valuations, he said, the fact that wealthier households hold more stocks than poorer ones does not mean bond-buying induced rises in stock prices has made that inequality worse.
"Quantitative easing had no medium-term implications for the U.S. income or wealth distribution -- it is only as good or bad as it was before the crisis," Bullard said.
He also said that raising the inflation target, which some have advocated as a way of bringing down unemployment faster, would likely hurt the poor more than help them because of their reliance on cash, which loses value when prices rise.
"While it is true this part of the population tends to have longer and more frequent spells of unemployment, monetary policy cannot influence the average unemployment rate in the medium- or long-term," he said. "A higher average inflation rate would hurt this poorest group in the economy."
The Fed has a 2-percent inflation target.
(Reporting by Gertrude Chavez-Dreyfuss; writing by Ann Saphir; Editing by Chizu Nomiyama)