(Recasts, adds comments from Q&A)
By Kristina Cooke and Emily Flitter
NEW YORK, April 15 The Federal Reserve's pledge
to keep interest rates low for an extended period should
reflect more "conditionality" on the state of the economy, a
top official of the U.S. central bank said on Thursday.
James Bullard, president of the St. Louis Fed, said the
pledge should not be linked to a specific time-frame.
"Everything depends on economic performance and we'd like
to be able to convey that," Bullard told reporters after a
speech to a Levy Economics Institute.
He characterized the U.S. economic recovery as "not super
strong" but "very reasonable."
The Fed cut its benchmark federal funds rate to near zero
percent in December 2008 and has continued to hold it there to
support the U.S. economic recovery. It also bought longer-term
assets including $1.25 trillion in mortgage-backed securities
to keep down borrowing costs.
The minutes of the Fed's last meeting, Bullard said,
conveyed the "flavor" of the policy-setting committee's
thinking. If the economy performed better the Fed could tighten
sooner, "but if it doesn't come in so strong or inflation
remains subdued then it could be a lot longer before we
tighten," he said.
Bullard, a voter on the Fed's policy-setting Federal Open
Market Committee this year, said asset sales would be one way
to tighten policy, but the Fed would have to be cautious.
REFORM PROPOSALS FALL SHORT
Bullard was sharply critical of Congressional proposals to
overhaul U.S. financial regulation, saying that only a few of
the current proposals are likely to help prevent future
The U.S. Senate is moving close to voting on proposed
financial regulatory reform legislation. The House of
Representatives passed its own bill late last year.
Both proposals create mechanisms designed to spot and head
off potential financial crises by establishing regulatory
councils, but Bullard said the Federal Reserve's political
independence may make it better suited than a council of
regulators to spot and act upon behavior that could threaten
the entire financial system.
The Senate bill would set up a nine-member council of
regulators, chaired by the Treasury secretary. The House bill
would establish an inter-agency council chaired by the Treasury
as well, but gives the Fed a bigger role as chief policy
"It seems like it would be difficult for an inter-agency
council to come to agreement on specific risk and an associated
action when times are good," Bullard said. "This type of
decision may be better suited to the Fed."
He said it was unclear if a systemic risk council would be
able to prevent a future crisis.
Bullard argued for a broader regulatory role for the U.S.
central bank, and said reform proposals that would strip the
Fed of supervision of smaller banks and create a "Wall Street
only" Fed are worrying.
"A Fed with an appropriately broad regulatory
responsibility provides the U.S. with the best chance to head
off a future crisis," he said. Many of the problems that led to
the current crisis occurred outside the Fed's purview,
complicating the U.S. central bank's role as lender of last
resort, he added.
"A lot of the talk about regulatory reform is too bank
centric," Bullard said, warning that the reform proposals would
leave the United States vulnerable to runs in the shadow
And while he agreed that a resolution regime for failing
financial institutions would prevent firms from taking
excessive risks, Bullard said "funeral plans" for firms did not
strike him as credible.
He also called the absence of discussion of Fannie Mae and
Freddie Mac, the two biggest U.S. mortgage finance companies
that operate under congressional charters, in the reform bills