Fed's Bullard: Europe's Greek move buys time

NASHVILLE, Tennessee (Reuters) - A top Federal Reserve official said on Wednesday that a $1 trillion rescue package to keep Greek debt woes from spreading appears to have calmed financial markets but warned that indebted nations must address fiscal problems or face future crises.

“The European package has had a big impact on markets and has at least bought time for the Europeans to more fully address their sovereign debt problems,” St. Louis Federal Reserve Bank President James Bullard told a conference.

The risks that turmoil surrounding Greece, which ran into trouble as investors began to doubt its ability to repay its massive debt, could chill the U.S. economic recovery are not high but the situation requires close monitoring, Bullard told reporters after his speech to the group, organized by the Tennessee Department of Financial Institutions.

“At the end of the day I don’t think the risks are that high right now, but we want to be careful ... I think the recovery is fairly robust, and I think it will continue, and we’re facing risks, but they’re not that high at this moment,” he said.

LESSON FOR U.S.

Bullard also warned that Greece’s woes should provide a cautionary lesson for the United States, which has run record budget deficits in recent years and faces huge long-run challenges to meet commitments under government-run retirement and health programs.

“It’s very important that we get our deficit and our levels of debt under control on a long-run basis,” he said in response to questions. “The situation in Europe just shows you how dangerous it is for a country, if you start to lose confidence in international markets.”

The White House’s top budget official echoed that concern in an interview with Reuters Insider on Wednesday.

“We want to make sure we never wind up facing the sorts of choices that Greece now faces,” White House budget director Peter Orszag told Reuters Insider in an interview.

While the United States was in “no imminent danger” of a crisis of Greek proportions, Orszag said: “I would prefer to be addressing this sooner rather than later.”

European Union finance ministers agreed on an emergency loan package on Monday with International Monetary Fund support to prevent a sovereign debt crisis that started in Greece from spreading through the euro zone.

The European Central Bank also announced steps to contain the crisis, saying it would buy euro zone government and private debt and abandon resistance to full-scale bond purchases, and the Federal Reserve re-opened currency swap lines with the ECB and other central banks.

Bullard, a voter on the Fed’s policy-setting panel, said the Greek crisis should not restrain the Fed from any decisions about lifting its vow to hold rates exceptionally low for an extended period.

“I don’t think at this point it would have any impact on U.S. monetary policy, but obviously we’re watching the situation very carefully,” he said.

The Fed at its most recent meeting said its promise to keep rates ultra low for a long time was justified by high unemployment, low inflation and low inflation expectations.

WELCOMES SENATE VOTE

Addressing financial regulatory reforms working their way through the U.S. Congress, Bullard and fellow policymaker Kansas City Fed Bank President Thomas Hoenig welcomed a Senate vote that would keep the U.S. central bank in charge of overseeing thousands of smaller banks.

Fed officials, including Fed Chairman Ben Bernanke, had sharply criticized a proposal to strip the Fed of its oversight of smaller banks, saying they would lose an important finger on the pulse of the economy that helps them guide monetary policy.

Bullard called the development “good news,” and Hoenig said in a statement the vote would preserve the Fed’s connection to smaller institutions around the country and not limit the focus of the central bank to big banks.

Many regional Fed banks would have been left supervising few banks or, in the case of Kansas City, no banks, if Senate Banking Committee Chairman Christopher Dodd’s plan to take the Fed out of the business of overseeing smaller banks had gone through. Under Dodd’s plan, the Fed would have maintained oversight only of institutions with assets greater than $50 billion.

The Senate is expected to approve the regulatory bill in coming weeks. The Senate version would have to be reconciled with language approved by the House of Representatives in December before it could be signed into law.