Tags: Fed | Bullard | Global | Inflation

Fed’s Bullard Warns of Global Inflation Threat: 'It Takes a Long, Long Time to Fix'

Friday, 23 March 2012 11:35 AM

The world's richest countries will battle inflation for years to come if they bungle the timing of tightening money supply, Federal Reserve Bank of St. Louis President James Bullard warns.

To spur recovery, central banks in the U.S., Europe and elsewhere have flooded their economies with liquidity, although such policies often fuel inflation down the road.

Up to now, inflation remains in check but sooner or later, central banks will have to rein in liquidity and hike interest rates when growth returns.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

If they wait too long for fear of spooking the economy, inflation will become a problem for a long time.

"Once inflation gets out of control, it takes a long, long time to fix it," Bullard tells Bloomberg Television.

Most of the countries in question belong to the Group of Seven nations, which include France, Germany, Italy, Japan, United Kingdom, and United States, and Canada.

Tough task

Timing a change in monetary policy is a tough task.

During bad times, central banks cut rates to encourage growth, and if they hike lending targets too soon or too high, the economy gets nervous and possibly contracts again.

If they keep rates too low, when the economy does recover, inflation rears its ugly head and rears it for a while.

Central banks are "known for overstaying their welcome on policies," Bullard says, adding "there’s some risk that you lock in this policy for too long a period."

The Federal Reserve has stated that economic conditions warranting exceptionally low interest rates will stick around through the end of 2014.

Not all on the Fed's body that votes on monetary policy, known as the Federal Open Market Committee, are so sure.

Bullard, for one, sees rate hikes in the U.S. coming around the end of 2013, and adds the U.S. economy right now may be at the cusp of finally brushing off the dust from the Great Recession and start growing with some momentum again.

"It may be a good time to take stock of whether we may be at a turning point," Bullard said separately in a speech in Hong Kong, Bloomberg adds.

"With numerous monetary policy actions still on the table, and others still affecting the economy with a lag, it may be especially difficult to remove policy accommodation at the appropriate pace and at the appropriate time."

Other monetary policy experts are hinting at less of a need to act, including former Federal Reserve Governor Randall S. Kroszner.

Headwinds still face recovery including exposure to Europe, weak demand and still-high unemployment rates.

Plus in 2011, the economy showed signs of improvement early on but later softened again, which would support the Fed's official stance that hurdles still face the U.S. economy and that loose monetary policy stays.

"I would agree with Chairman Bernanke that we don't want to start popping the champagne corks yet," Kroszner tells CNBC.

"We've seen some very important false dawns in the U.S. labor market....In early 2011, we started to see very strong job creation, more than 200,000 a month, for three months, then things fell again."

Bernanke, meanwhile, continues to remain cautious over the pace of recovery, insisting that conditions meriting low interest rates will likely stick around through 2014.

Consumer demand, which accounts for about lion's share of total U.S. economic output at over 70 percent, still remains sluggish.

"Right now, in terms of debt and consumption, we're still way low relative to the pattern before the crisis," Bernanke told students in the second of two lectures at The George Washington University, according to Reuters.

"We lack a source of demand to keep the economy growing."

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

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