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By Mark Felsenthal
ST. LOUIS, Mo. May 6 The U.S. Federal Reserve
is closely watching for signs the European sovereign debt
crisis could derail a fragile U.S. economic recovery, a top Fed
official said on Thursday.
"One risk to the outlook ... is the fallout from potential
sovereign debt default as conditions continue to deteriorate in
Greece and other countries," St. Louis Federal Reserve Bank
President James Bullard told an audience at Washington
University's Olin Business School.
The euro and stocks worldwide have fallen over the last
three days over worries that Greece's debt crisis was spreading
to other weak euro zone economies. Greece is preparing to adopt
harsh austerity measures as part of a European rescue package
aimed at staving off a default on its debt.
Bullard's remarks are the first direct indication that
European debt worries are a concern for the Fed, which renewed
its vow to hold benchmark U.S. interest rates exceptionally low
for an extended period at a meeting in late April.
European turmoil is by definition a factor in Fed
deliberations about monetary policy, said Bullard, a voter this
year on the Fed's policy-setting panel.
"Of course we're always looking at all developments
globally when we're trying to make monetary policy," he told
reporters after his speech.
"The Greek situation would be no exception to that ... For
now it's just something we're watching very closely," he said.
Bullard raised the possibility Greece might have to
restructure its debt, for example by delaying payments, but
said that process is familiar from the experience of other
"Restructuring debt, if it does come to that, you can live
through it ... it's not pleasant," he said. "It does create a
lot of volatility."
Asked why policy-makers failed to foresee the Greek crisis,
Bullard said Greece had hidden the extent of its debts.
"Frankly Greece ... lied about how much they were
borrowing," he said. "It wasn't a small discrepancy, either."
Bullard said that as far as he knows other nations whose
fiscal situations are in question, such as Portugal, Spain, and
Italy, have not misrepresented data.
Bullard declined to respond specifically to whether he is
considering dissenting against maintaining the Fed's low-rate
pledge despite signs the recovery is gaining traction, as one
other policy-maker has, but suggested that is not likely.
"It's largely a consensus organization at the end of the
day and I respect that," he said.
Pressed on whether he thinks that based on positive trends
in the economy it was time to lift the extended period
language, Bullard said, "No, I don't think so. I've just tried
to stress that it's important to have a .... policy that
emphasizes that everything depends on how the economy evolves
Bullard said good news outweighs bad news as the U.S.
economy crawls back to health from a deep recession.
"We're well into our recovery process," he said.
Rebounding manufacturing and slowly improving labor markets
are among indications of improvement in the United States, he
said, adding he expects employers to continue to add jobs in
the spring and summer.
Inflation remains low, he said.
"For now ... inflation remains pretty subdued. To the
extent that we have inflation risks, it's a couple of years
into the future," he said.
(Reporting by Mark Felsenthal; Editing by James Dalgleish)