Receding uncertainty about the global economy is bullish for U.S. growth this year but the country still faces risks from unresolved long-term fiscal challenges, a top Federal Reserve official said on Wednesday.
St. Louis Fed President James Bullard, a voting member of the U.S. central bank's policy-setting committee in 2013, said implementation of the country's new healthcare law could also create headwinds, though other restraints have been lifted.
"This year seems to be characterized by less macroeconomic uncertainty compared to previous years," Bullard said in prepared remarks to an agribusiness conference hosted by Arkansas State University. "This bodes well for U.S. macroeconomic prospects in 2013."
However, the U.S. economy could be hit by steep automatic spending cuts on March 1 unless the country's lawmakers agree to other measures to reduce its long-term deficit, which economists and politicians warn would undermine the recovery.
Bullard voted with his colleagues to maintain Fed bond purchases at an $85 billion monthly pace at the central bank's meeting on Jan. 29-30. The central bank argued that its aggressive action was needed to support a gradual recovery and reduce unemployment, which hit a lofty 7.9 percent in January.
Asked by the audience if he was concerned that the central bank might be risking inflation by pursuing easy monetary policy, Bullard emphasized that U.S. core and headline inflation are running well below the Fed's 2 percent target and as a result it had "room for maneuver."
Bullard said calmer conditions in Europe, where a bold promise of action by the European Central Bank had worked better than "might have been expected," was a key reason for the better global growth outlook and should aid growth elsewhere.
"Global macroeconomic uncertainty has been relatively high in the past three years," he said. "By contrast, 2013 has dawned with a reduction in global macroeconomic uncertainty that may persist for some time."
Bullard is one of the more optimistic of the Fed's 19 members of its policy-making committee, who has previously forecast that U.S. growth would reach 3.5 percent this year.
In its advance estimate, the government reported the economy shrank at a 0.1 percent annual pace in the final three months of 2012 after growing at a 3.1 percent rate in the third quarter.
Other receding impediments to the U.S. recovery include a seemingly decisive improvement in the fortunes of the U.S. housing market, Bullard said, and he was also cautiously upbeat that U.S. lawmakers would eventually reach a deal on the deficit.
"The fiscal cliff... that has been partially resolved with the New Year's Eve deal and it looks like there may be more compromises ahead," he said.
Congress agreed to raise taxes on American families who earn more than $450,000 a year in order to preserve Bush-era tax cuts that would have expired for everyone else on Jan. 1 absent congressional action.
However, lawmakers must still agree to raise the U.S. debt ceiling and tackle a long-term deficit reduction plan in order to avoid the automatic spending cuts, called the "sequesters" in Washington. President Barack Obama and his Democrats want the deal to include revenues from closing some tax breaks. Republicans favor spending cuts and oppose further tax hikes.
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