WASHINGTON - With the U.S. housing recovery taking longer than he had expected, St. Louis Federal Reserve President James Bullard Thursday said he is open to "something more radical," although he did not elaborate further.
In an interview on CNBC, he also expressed concern about inflation, which, however, is likely to return toward the implicit Fed target.
Commenting on the initial claims report released earlier Thursday, Bullard noted that claims have surprised on the upside for the past six or eight weeks. "That's very helpful to us," he said.
Earlier Thursday, the Labor Department said initial claims fell 5,000 to 388,000 in the week ended November 12.
Regarding growth in general, "I do hope that 2012 will be stronger than the second half of 2011," Bullard said, adding that despite the sovereign debt risk, "Europe doesn't have to morph into a global macroeconomic shock."
Besides, U.S. businesses' growth strategies are in Asia, helping to offset weaker North American markets.
Bullard expects the U.S. economy to grow at a pace of 3% to 3.5% next year.
Europe is certainly a risk to the U.S. especially "if the situation melts down in a disorderly way."
Asked what the Fed is prepared to do to help Europe, Bullard said the most logical thing to do "would be to reopen some of the liquidity facilities that we had in place during 2008 and 2009" although no decision has been made.
This is a "collateralized lending policy," he said, which is not going to cause inflation.
Asked whether it could take sovereign debt as a collateral, Bullard said "we've got a long list of established rules for what kind of collateral we take."
Bullard, however, ruled out a U.S. bailout of Europe, saying, "we've got enough on our plate."
"I don't see how it could happen," he added. "It's up to the Europeans."
As for the role of the European Central Bank in the sovereign debt crisis, he said "The notion that the ECB can ride to the rescue is a bit overplayed."
Bullard otherwise repeated his views on the Fed communication policy, stressing that the promise to keep rates at current low levels for even longer than through mid-2013 is "sitting in the future" while markets know if the economy does better and inflation rises the Fed will raise rates and so "they don't believe you today."
Bullard also repeated his objection to tying the federal funds rate to any kind of unemployment trigger.
"I don't want to tie monetary policy directly to observations on unemployment," he said.
"As a matter of prudent policy making," he said, "you should guard against that."
Instead, "The best thing you can do," he said, is to "keep the expansion going over a long period of time, unemployment will come down."
Bullard also addressed the "bad" U.S. fiscal situation, with no surprise expected from the Super Committee.
"They will either deadlock or a they'll come to a small agreement," Bullard predicted.
He added that, generally, Washington "got the wrong message" that the U.S. rating downgrade did not matter.
He warned of higher borrowing rates down the road, a situation some large EMU countries are already facing.
"One day it will come the U.S."
Interest rates will in fact eventually come back to normal and "We have to be able to handle that situation."
Bullard also stressed "international capital markets can be fickle and they can turn on you on a dime as other countries are finding out and you have to be ready for that."
Commenting on the economy, Bullard said while he expects growth to strengthen going forward, housing is taking longer than he had anticipated to recover.
"It looks like it's going to flatline for a long time," he said, noting housing investment in the U.S. is still down.
Earlier Thursday, the Commerce Department said housing starts fell 0.3% in October to 628,000, although permits rose 10.9% to 653,000.
"I've become more pessimistic about the housing outlook," Bullard said, adding he expects the sector to be "flat for longer than I originally thought."
As a result, he would be open to "exploring something more radical" to help the housing market, without elaborating on what type of action it could be.
He said the existing government programs are only "affecting the marginal guys."
On inflation, Bullard said with the year-over-year inflation around 3.5%, it is a "concern.
Although he expects inflation to come back toward the implicit Fed target, "we haven't seen enough moderation yet to really make that conclusion" especially since commodity prices are rising again.
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