NEW YORK – Interest rates may not be raised until 2012, Federal Reserve Bank of St. Louis President James Bullard told area business leaders today.
“Assuming that the most recent recession ended this past summer, and assuming that the FOMC would behave in the same way that it’s behaved in the past, this could mean the FOMC would not start increasing rates until early 2012,” Bullard said in a speech at the 2009 Commerce Bank Economic Breakfast in St. Louis, according to a press release from the Fed. “To be sure,” Bullard said, “the FOMC will be heavily weighing concerns that stem from criticisms that the Fed kept interest rates too low for too long, contributing to the housing market bubble.”
“The FOMC did not begin policy rate increases until 2 ½ - 3 years after the end of each of the past two recessions,” he said.
Monetary policy, he said, is more than changes in interest rate he said, noting it is “disappointing” the markets remain focused on interest rates rather than quantitative easing. “The Fed has been conducting successful policy this past year through quantitative easing.”
He noted the Fed’s balance sheet will peak near $2.5 trillion, or about three times its usual size, with the monetary base twice its usual amount, “which creates a risk of inflation in the medium term.”
“The main challenge for monetary policy going forward will be how to adjust the asset purchase program without generating inflation and still providing support to the economy while interest rates are near zero,” Bullard said. He said the FOMC should “adopt a state-contingent policy rule that would allow for the adjustment of asset purchases as new information on the economy becomes available.”
He called “’Too Big to Fail’ an “intolerable situation” and said it needs to be addressed.” But “quite a few” of the troubled firms were not banks, he said, “The main issue here is not about banking reform, but about the shadow banking system and addressing regulation for that financial segment.”
