WASHINGTON — St. Louis Federal Reserve Bank President James Bullard Thursday said the economy, and in particular the housing market, has shown improvement over the past few years.
"We're in a better position than we have been in several years," Bullard said in response to an audience member's question following a speech in Rodgers, Arkansas, adding he "continues to be optimistic about 2014."
While admitting the U.S. economy has not "grown as fast as we would like in the past few years," Bullard pointed to household deleveraging, better economic conditions in Europe and an improving housing recovery as positives for economic growth.
"Housing has improved over the last 18 months," Bullard said. "Housing prices are up considerably, and that seems to go all around the country — some places are better than others, but that seems to go all over the country."
Sales are up, permits are up, construction is up, "even commercial real estate looks better - quite a bit better than it did two years ago," Bullard said. "So I think the momentum in the housing market is stronger than it was."
He added: "I know the run up in rates in the summer probably hurt housing a little bit, but still on the big picture, those are some factors that are waning for the U.S. economy."
In his prepared remarks, Bullard questioned the timing of reducing the Federal Funds Rate to zero in the midst of the 2008 crisis, and argued the rate cuts from September 2007 to March 2008 did little to prevent financial panic.
"I think the December 2008 FOMC decision unwittingly committed the U.S. to an extremely long period at the zero lower bound similar to the situation in Japan, with unknown consequences for the macroeconomy," Bullard said.
Bullard, who is a voting member of the Fed's policymaking Federal Open Market Committee this year, did not comment on current monetary policy or the economy in his prepared remarks. But instead focuses on the monetary policy response in the lead up to and during the financial crisis.
Bullard, who became president of the St. Louis Fed in April 2008, said some analysis suggests that the sooner policymakers set the policy rate to zero, the sooner the economy will recover and the sooner interest rates can be returned to normal.
"I have seen no evidence that this is true during the last five years," he said.
The Fed began to see the crisis in August 2007 and reacted using conventional tools, Bullard said. In particular, it lowered the federal funds rate target "substantially" between September 2007 and March 2008, from 5.25% to 2.25%, he said.
"The cut in the policy rate during the September 2007-March 2008 time frame was not as good a tonic for the situation as might have been hoped," Bullard said.
In Dec. 2008, the FOMC changed the target policy rate to a range of 0 to 0.25 percent, where it remains today.
Although the idea that "lower interest rates cure all" is commonplace within the Fed, Bullard said, "the rate cuts of early 2008 evidently did little to prevent the financial panic, and may have exacerbated the situation to some degree."
Bullard said the lower interest rates may have sent investors looking for higher returns elsewhere as mortgage backed securities were souring, particularly in global commodities. "The lower interest rates the Fed engineered seemingly encouraged this activity, as firms borrowed cheaply and attempted to profit in commodities," Bullard said.
He cited a doubling of the price of crude oil in the span of about 10 months. "This oil price shock contributed to the slowdown in the U.S. economy in the second half of 2008," Bullard said.
Bullard also said there wasn't enough consideration of what happened in Japan in the 1990s when the Bank of Japan lowered its policy rate to near zero, where it remain there today.
"The debate over the wisdom of locking in near-zero rates did not take sufficient account of the experience in Japan, in my view," Bullard said.
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