Tags: Fed | Bullard | Higher | Rates | QE2 | Failing

Fed’s Bullard: Higher Rates Doesn’t Mean QE2 Failing

Thursday, 02 December 2010 01:34 PM

Federal Reserve Bank of St. Louis President James Bullard said a recent increase in market interest rates doesn’t mean the central bank’s expansion of monetary stimulus is failing.

Yields on 10-year Treasuries have risen to 2.94 percent from 2.49 percent on Nov. 4, the day after the Fed’s decision to buy $600 billion in Treasuries. While the program “puts downward pressure” on rates, successful policy would generate faster growth and higher real interest rates while also increasing inflation expectations, Bullard said today in a slide presentation prepared for a speech in Washington.

“Therefore, looking at the level of nominal rates alone is insufficient to judge the success of the program,” Bullard said in the presentation to the National Economists Club.

The remarks are part of Bullard’s response to criticisms of the Fed’s program. Bullard is among Fed policy makers who backed the plan in a bid to boost economic growth and lower unemployment. The decision has generated the most intense criticism of the Fed in three decades, especially from Republican politicians, for risking a surge in inflation and a weaker dollar.

Bullard said “dollar depreciation is a normal by-product of an easier monetary policy, provided all else is held constant in the rest of the world.”

He responded to another criticism that the Fed is “monetizing” debt issued by the U.S. government. Once the Fed shrinks its balance sheet to “normal, pre-crisis levels,” the Treasury will have “just as much debt held by the public as before the Fed took any of these actions,” he said.

Maximum Impact

And to skeptics who say the asset purchases won’t be effective, Bullard said monetary-policy easing “produces its maximum impact on real variables in the economy, including output, consumption, and investment, with a lag of six to 12 months.”

Bullard, 49, became the St. Louis Fed’s chief in April 2008. The Dec. 14 Federal Open Market Committee meeting will be the last one this year in which Bullard can vote; he will next have a vote on monetary policy in 2013.

The decision to buy Treasuries has been dubbed QE2 by investors and economists for the second round of quantitative easing, a term for monetary policies that change the quantity of bank reserves.

The FOMC said in its Nov. 3 statement that the jobless rate was too high and inflation too low relative to levels that policy makers deem consistent with the central bank’s legislative mandate for maximum employment and stable prices.

Jobs Report

U.S. employers probably added 148,000 jobs in November, and the jobless rate held at 9.6 percent, based on the median estimates of analysts surveyed by Bloomberg News. The Labor Department issues its monthly jobs report tomorrow at 8:30 a.m.

At their Nov. 2-3 meeting, Fed policy makers projected a fourth-quarter 2011 unemployment rate of 8.9 percent to 9.1 percent, compared with 8.3 percent to 8.7 percent in their previous forecast in June. Officials said the economy will expand by 3 percent to 3.6 percent next year, down from a 3.5 percent to 4.2 percent projection in June.

Bullard didn’t comment in the prepared presentation on the Fed’s disclosure yesterday of recipients of $3.3 trillion in central bank aid during the financial crisis, which showed European firms including Barclays Plc and UBS AG were among the biggest borrowers from emergency lending programs.

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Federal Reserve Bank of St. Louis President James Bullard said a recent increase in market interest rates doesn t mean the central bank s expansion of monetary stimulus is failing.Yields on 10-year Treasuries have risen to 2.94 percent from 2.49 percent on Nov. 4, the day...
Thursday, 02 December 2010 01:34 PM
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