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Fed’s Bullard: Fiscal, Not Monetary, Policy Key to Jobs

Wednesday, 16 May 2012 03:50 PM

Federal Reserve Bank of St. Louis President James Bullard said fiscal policies are needed to reduce the 8.1 percent U.S. unemployment rate and additional asset purchases by the Fed, or quantitative easing, would risk a surge in inflation.

“It may be better to focus on labor-market policies to directly address unemployment instead of taking further risks with monetary policy,” Bullard said Wednesday in Louisville, Kentucky. “If anything, the committee may be trying to do too much with monetary policy, risking monetary instability for the U.S. and the global economy.”

The policy-making Federal Open Market Committee on April 25 reiterated its expectation that subdued inflation and economic slack will probably warrant “exceptionally low levels for the federal funds rate at least through late 2014.” Bullard has said he is opposed to such a pledge because policy should be made in response to economic data and not rely on a public timetable.

“The U.S. macroeconomic data have been stronger than expected as of last autumn,” Bullard said to business people and community leaders in a presentation hosted by the St. Louis Fed. “The main risk is that the committee will, as it has in the past, overcommit to the ultra-easy policy. The policy has been appropriate so far, but could reignite a 1970s-type experience globally if pursued too aggressively.”

Fed ‘On Hold’

Bullard told reporters after his speech that there is a “good logic” to the central bank putting policy “on hold” for an indefinite period of time. “Until we get a clear difference in the economic outlook” with an acceleration or slowdown, there is no need to change course, Bullard said.

“As long as we continue to go along in the current mode, which is moderate growth, continuing improvement in labor markets, inflation above target but coming down toward target, in that kind of situation we can stay on pause,” he said.

Bullard told audience questioners after his talk that the European debt crisis was unlikely to have a major impact on U.S. growth. While the turmoil “will roll on for a very long period of time,” European officials have averted the likelihood of a financial panic that would be most damaging to the U.S., he said.

The St. Louis Fed official told the audience in response to a question that he was disappointed in Congress’s failure to resolve uncertainty over fiscal spending this year.

Bullard said he didn’t favor using government spending as a way to stimulate growth since consumers and businesses respond by adjusting their plans in expectation of higher taxes in future years.

‘Large Cloud’

“The U.S. has a large cloud” from uncertainty, Bullard said, though the likelihood of a recession is no more than normal next year.

If the U.S. economy encountered another shock, Bullard said “the committee can respond as appropriate to a significant deterioration” in the outlook.

In his formal presentation, Bullard said near-zero interest rates could be creating “distortions” in the economy, including “punishing savers.”

While generally opposed to more spending, Bullard told reporters he could see room for narrowly targeted programs such as retraining to address a mismatch of worker skills and jobs. “In aggregate, I do think there is a skills mismatch” with former construction workers, for example, lacking the education for jobs in a “hot sector” like technology, he said.

Smallest Increase

Payrolls climbed by 115,000 workers in April, the smallest increase in six months, Labor Department figures showed. The jobless rate fell to a three-year low of 8.1 percent as people left the labor force, adding to worries that the economic expansion is cooling.

Fed officials have been discussing how much of the U.S. unemployment rate has been caused by “structural” factors such as a mismatch of worker skills and available jobs. Richmond Fed President Jeffrey Lacker said the mismatch may lead to a higher natural rate of unemployment. Fed Chairman Ben S. Bernanke said “continued weakness in aggregate demand is likely the predominant factor” in unemployment.

“Labor market policies such as unemployment insurance and worker retraining have direct effects on the unemployed,” Bullard said in his presentation.

Quarterly Report

In his speech, Bullard also repeated his call for the Fed to produce a quarterly monetary policy report that would “provide a more fulsome discussion of the outlook for the U.S. economy.”

Lacker, as well as the presidents of Fed banks in San Francisco, Atlanta and Philadelphia, have said since the FOMC meeting that more Fed stimulus probably won’t be needed.

In a press conference following the April 24-25 meeting, Bernanke signaled that further easing is unlikely unless the economy unexpectedly deteriorates. Bernanke said it would be “reckless” to pursue policies that would drive up inflation when it’s already near the Fed’s target, while noting he’s “prepared to do more” should conditions worsen.

Bullard, who doesn’t vote on monetary policy this year, was the first Fed official in 2010 to call for a second round of asset purchases by the central bank. The Fed pushed down its target interest rate close to zero in December 2008 and has engaged in two rounds of asset purchases totaling $2.3 trillion to boost the economy.

Bullard, 51, joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.

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Wednesday, 16 May 2012 03:50 PM
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