The chance of a renewed U.S. recession has receded and there may not be a strong enough case for additional stimulus, Federal Reserve Bank of St. Louis President James Bullard said.
“The risk of double-dip recession has probably receded some in the last six to eight weeks,” Bullard said today in an interview with CNBC. “The economy has slowed, but it hasn’t slowed so much that it’s an obvious case to do something. A very reasonable decision would be to say, ‘maybe we should push it off a meeting or two and see how the data comes in.’”
The Federal Reserve is considering whether to add to its purchases of Treasury bonds to stimulate the economy as unemployment stays close to 10 percent. New York Fed President William Dudley and Chicago Fed President Charles Evans have voiced support for more purchases, while Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher have said such actions may not work.
The euro weakened against the dollar and Treasury 10-year notes fell after Bullard’s remarks.
The euro dropped as much as 0.3 percent to $1.3842 and traded at $1.3881 as of 7:28 a.m. in New York. The 10-year note yield rose 2 basis points to 2.40 percent, according to BGCantor Market Data.
Bullard said the next Federal Reserve meeting on Nov. 2-3 will be an analysis “blizzard” and the decision will be a “tough call.”
“I will go into the meeting with an open mind and you don’t want to prejudge these things,” he said. While the case for more stimulus isn’t a “slam dunk,” if the situation calls for it, “we’ll have to take action,” he said.
The Fed said after its Sept. 21 meeting that it was “prepared to provide additional accommodation if needed.” Fisher, who won’t vote on policy until next year under the Fed’s rotating system, said late yesterday that further so-called quantitative easing “is not a done deal.”
“It’s still possible to make the case that the economy will improve naturally on its own in 2011 and that we’ll have faster growth” and inflation “closer to target,” Bullard said. A “natural thing” for officials who hold that view “would be just to say ‘Well, we’ll wait until the December meeting,’” when we have more data, he said.
Bank of Japan
Bullard warned in July there was a rising risk of a Japanese-style deflation in the U.S. He said today that the “disinflation trend” in 2010 has been “bothering” him.
The Bank of Japan this week cut its benchmark interest rate to “virtually zero” and boosted its asset-purchase plan. In the U.K., a split among Bank of England policy makers on whether to foster growth or combat the threat of inflation is deepening.
When asked about the size of a possible expansion of purchases, Bullard said a “better number to think about” was the monthly Treasury sale total of about $100 billion.
“If you sustain QE over a period of time at $100 billion a month, you’re going to get to several hundred billion or more,” he said. “The way I would do it is small amounts and then make a decision at the next meeting and that will set up expectations about a path, but then if the economy improves and things start to go better, then you can slow down or stop.”
If the economy were really to “perk up,” the Fed could begin to sell its bond holdings, he said.
When asked if he would follow the Bank of Japan by diversifying purchases away from Treasuries, Bullard said that he hadn’t heard discussions about that at the Fed. “I’d be very reluctant myself to go in that direction,” he said.
The worst U.S. recession since the Great Depression ended in June 2009, the National Bureau of Economic Research said on Sept. 20. Still, the recovery is weakening. Economic growth decelerated to an annualized 1.7 percent rate in the second quarter from 3.7 percent in the first and 5 percent in the last three months of 2009, according to the Commerce Department.
Unemployment probably climbed to 9.7 percent last month from 9.6 percent in August, according to the median estimate of 62 economists surveyed by Bloomberg News ahead of an Oct. 8 report from the Labor Department.
The data may also show companies added 75,000 workers to payrolls, and total hiring stagnated amid cuts in government staffing as the decennial census wound down. The Labor Department report is scheduled for 8:30 a.m. New York time.
“The big issue has been this soft patch this summer,” Bullard said. Still, a double dip “is something I don’t think we’ll see.”
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