NEW YORK – A “clear” disinflationary trend began in the U.S. this year and monetary policy should be designed to prevent further inflation, St. Louis Federal Reserve Bank President James Bullard told the National Economists Club Thursday.
Asset purchases carry risks and rewards, but Bullard said he “believes the benefits outweigh the risks,” according to text of his remarks, released by the Fed. He said “regular review” of the program will determine if adjustments are needed.
Although inflation hovered near the implicit FOMC target but, “during 2010, a clear disinflation trend developed.” Japan showed that it’s hard to escape “a near-zero nominal interest rate, mildly deflationary equilibrium,” Bullard said. “The Japanese experience has generally been regarded as disappointing. U.S. policy should strive to avoid this possibility.”
The FOMC must avoid further disinflation, Bullard said. “Further disinflation with short-term nominal interest rates at zero would mean rising real interest rates in the face of a slowing pace of recovery” Bullard said.
Also, the unintended steady state must be pre-empted.“It would be difficult to escape the low nominal interest rate, mildly deflationary equilibrium that Japan has experienced,” Bullard said.
Finally, Bullard said, the FOMC must defend its implicit inflation target from the low side, which helps maintain longer-run inflation expectations.
Defending quantitative easing, Bullard said, the financial market effects of the program have been near expectations. He added that dollar depreciation goes hand-in-hand with accommodative monetary policy.
While inflation “is a legitimate concern,” right now disinflation is “worrisome.”
Bullard also highlighted the imperative need for the Congress and the President to attack the long-run budget problems the nation faces. He said that Europe has given the U.S. an important wake-up call on how devastating it can be to leave long-run structural deficit problems unaddressed.
