NEW YORK – Quantitative easing has been an effective tool, but with the economy improving the debate become whether to complete it or taper it off, St. Louis Federal Reserve Bank President James Bullard said today.
The second round of quantitative easing – announcing a policy of the Fed buying about $75 billion of Treasury securities a month through mid-2011 -- occurred since the Fed funds rate target was near zero. Such policy “is an effective tool when the policy rate is near zero,” Bullard said in remarks Thursday at the Bowling Green Area Chamber of Commerce Coffee Hour.
“Even before this action, monetary policy was ultra-easy,” Bullard said, with the policy rate near zero for an “extended period” and the Fed’s balance sheet much larger than it was before the crisis. QE2, Bullard said, was an attempt to end the disinflationary trend in 2010.
Bullard stated that ahead of the November FOMC meeting, the policy change had been largely priced into markets, and the financial market effects were conventional. In particular, he said, “real interest rates declined, inflation expectations rose, the dollar depreciated, and equity prices rose.” Bullard added, “These are the ‘classic’ financial market effects one might observe when the Fed eases monetary policy in ordinary times.”
Bullard also pushed inflation targeting. “Inflation targeting is another way to force more accountability to the central bank and anchor longer-term expectations. Make the central bank say what it intends to do,” he said, “and hold the central bank accountable for achieving the goal.”
“Inflation targeting,” Bullard concluded, “is the appropriate modern alternative to historical commodity standards.”
