Federal Reserve Bank of St. Louis President James Bullard said inflation below the central bank’s 2 percent target warrants prolonging the “aggressive” use of bond buying to spur growth and bring down unemployment.
While “labor market conditions have improved since last summer,” Bullard said in remarks prepared for a panel discussion in Montreal, “surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame.”
The Federal Open Market Committee, which meets next week, is discussing when to slow $85 billion in monthly bond purchases, with San Francisco Fed President John Williams saying last week a “modest adjustment downward” in the buying is possible as “early as this summer.”
Atlanta Fed President Dennis Lockhart said “very mixed” economic data makes him “more cautious” about a near-term reduction in purchases.
The FOMC said May 1 it will continue buying bonds “until the outlook for the labor market has improved substantially.” Payrolls rose 175,000 in the U.S. last month, while the unemployment rate climbed to 7.6 percent, Labor Department figures showed June 7.
“Inflation in the U.S. has surprised to the downside,” Bullard, who votes on monetary policy this year, said at the International Economic Forum of the Americas conference.
Slow but steady growth, improving labor markets and limited financial market excess “suggests that the Federal Open Market Committee can continue to pursue its aggressive asset purchase program,” he said.
The St. Louis Fed official has been among central bank officials concerned about falling inflation. Price gains as measured by the personal consumption expenditures price index rose 0.7 percent for the year ending April, below the central bank’s 2 percent goal.
The possibility of excesses such as asset price surges “bears careful watching,” Bullard said.
“An important concern for the FOMC is that low interest rates can be associated with excessive risk-taking in financial markets,” Bullard said. “So far, it appears that this type of activity has been limited since the end of the recession in 2009.”
Bullard, 52, who calls himself the “North Pole of inflation hawks,” has been viewed as a bellwether for investors because his views have sometimes foreshadowed policy changes. He published a paper in 2010 entitled “Seven Faces of the Peril,” which called on the central bank to avert deflation by purchasing Treasury notes.
At the time, he also called for the Fed to engage in open- ended bond purchases, without a set goal or ending date. That approach has been adopted in the latest round of purchases.
Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
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