Tags: Bullard | Fed | Easy | Money

Bullard: Time for Fed to Pause on Easy Money

Friday, 24 February 2012 08:06 AM

Now is a good time for the Federal Reserve to step back from rolling out loose monetary policies and see if previous measures designed to spur economic growth and price stability have worked, says James Bullard, head of the Federal Reserve Bank of St. Louis.

The economy could grow as high as 3 percent in 2012, while unemployment rates are falling, and may dip below 8 percent later this year, down from current levels of 8.3 percent, Bullard tells CNBC.

"The data is better so it's a natural time for the committee to be on pause for a while," Bullard says. "We've already got a very easy monetary policy."

Editor's Note: Meltdown on Main Street Coming, Prepare Now

Monetary policy has been very easy, indeed.

The Federal Reserve has cut interest rates close to zero and has purchased $2.3 trillion in assets from banks in a policy known as quantitative easing.

Under a first round of quantitative easing, the Fed snapped up $1.7 trillion in assets from banks, mainly mortgage-backed securities, while a second round saw the Fed buy $600 billion in Treasurys.

The Federal Reserve has also reshuffled its holdings of Treasurys to keep interest rates low, prices stable and unemployment rates as low as possible.

A side effect of such policies includes inflation as well as easy money trickling into to commodities markets and pushing up already pricey oil.

Talk is on the table the economy may need a third shot of such monetary stimulus, known widely as QE3, but maybe the Fed should take a break and let past policies play out.

"This is a normal situation for the committee to sit back and get more data and try to collect our thoughts about the main things that are affecting our economy right now," Bullard says.

"I wouldn't take QE3 off the table every, I have been one that says this is a potent weapon that we can use but we should use it only if the economy deteriorates especially if inflation rates come in below our inflation target," he said.

"We're not in that circumstance right now"

Furthermore, past easing measures have pushed up oil prices, as critics have said that if the Fed wants to take credit for its policy's pushing up the stock market, it has to do likewise with oil.

"I do think that some of it fed through to commodity prices, and I think that it's a serious issue for the committee to consider."

The Wall Street Journal writes in an editorial that while geopolitical tensions and rising demand for countries like China are to blame for rising oil, monetary policy deserves responsibility as well.

"The Federal Reserve throughout Mr. Obama's term has pursued the easiest monetary policy in modern times, expressly to revive the housing market. It has done so with the private support and urging of the White House and through Mr. Obama's appointees who are now a majority on the Fed's Board of Governors."

Expect prices to continue climbing.

"Prices stabilized when QE2 ended. But in recent months the Fed has again signaled its commitment to near-zero interest rates first through 2013, and recently through 2014. Commodity prices, including oil, have since begun another surge, and hedge funds have begun to bet on commodity plays again," the Journal writes.

Editor's Note: Meltdown on Main Street Coming, Prepare Now

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Friday, 24 February 2012 08:06 AM
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