(Updates with Bullard remarks to reporters)
By Alister Bull
MEMPHIS Oct 14 The U.S. economy risks a
protracted slump if government action fails to counter the
credit crisis, but the Federal Reserve should not cut interest
rates any further, a top Fed official said on Tuesday.
"Overreliance on interest rate policy in this environment
does little to solve the problems at hand and, in addition, may
cause a new and difficult-to-solve inflation problem in the
wake of the current turbulence," St Louis Federal Reserve
President James Bullard said in a speech.
Bullard is not a voting member of the Fed's interest-rate
setting committee this year, and has been outspoken in recent
weeks about the risk that cutting rates too low could stoke
inflation in the future.
He later told reporters, in more hawkishly pointed remarks,
that he did not favor additional Fed policy easing.
"We had a pre-emptive policy where we dramatically lowered
rates earlier in the year... At the levels we're at now, I
don't think that further moves would do much good, he said.
The Fed, acting in coordination with other central banks in
Europe and Asia, cut interest rates by a half point last
Wednesday to 1.5 percent and warned that the global credit
crisis would seriously impact the economy.
The move was taken amid collapsing world wide stock markets
as investors lost faith in financial institutions and took
fright. Investors think they will act again.
Financial futures imply an almost 90 percent likelihood the
Fed will cut rates by 25 basis points at its next meeting, on
Oct. 28-29, in the face of a serious slowdown.
But Bullard cautioned that this was not the right policy
prescription for what ailed the U.S. economy.
"Moving interest rates in an environment as uncertain as
this one does not have a big effect and can get lost," he told
"Interest rates are a very broad and blunt policy
instrument and, above all, (do) not really specifically address
(the) problems we're facing."
On the other hand, he acknowledged that there were grave
risks confronting the country.
"It is far from clear how financial market turmoil of this
magnitude will ultimately affect the real economy. Unchecked,
the turmoil could have severe negative consequences," he told
The Economic Club of Memphis.
"The economy may have slowed significantly in the third
quarter. This slowing is associated not so much with financial
market turmoil, but instead with the rapid run-up in energy and
commodities prices during the spring and summer, along with
increasing weakness in labor markets," he said.
Crude oil peaked at about $147 a barrel in July, but has
since fallen by about 45 percent to around $79 on growing
concern that the economy could slip into recession and drag
down demand. Other commodities prices have fallen in a similar
Bullard said that aggressive action by the Fed and the
government -- which has pulled together a $700 billion bank
bailout package -- could ensure that the country escapes the
fate of Japan's "lost decade" of stagnation in the 1990s.
"If financial market turmoil can be contained, possibly
through aggressive government policy, then a relatively benign
outcome is possible in which U.S. economic performance is
sluggish but does not involve a protracted downturn," he said.
(Editing by Leslie Adler)