HONG KONG — St. Louis Federal Reserve Bank president James Bullard said yesterday he expects monetary aggregates to return to more healthy growth as the economic recovery takes hold, but warned of a medium-term inflation risk.
He told the Institute of Regulation and Risk for North Asia that large fiscal deficits coupled with low interest rates and a “very large” balance sheet could be problematic in the medium term.
“We don’t have an inflation risk right now in the U.S. but in the medium term there’s a fairly substantial inflation risk in the U.S. because of large fiscal deficits, coupled with low interest rates and a very large balance sheet,” Bullard said.
He added that Fed officials need to “play their cards right” to keep inflation within an acceptable range.
Bullard said central banks will have to work to regain credibility in the coming years after the emergency measures that have recently been implemented.
“I expect more volatility in the next five years than you would otherwise expect as it is going to be difficult to get this credibility in policy in the very near term as we’ve had to take all these unprecedented actions,” he said
Without naming names, Bullard said that sovereign debt could be restructured without causing too much economic disruption.
“It has happened a lot in the past. It hasn’t been a trigger for global recession in the past,” he said. “You could say that this time is different, but I don’t think so.”
Asked about efforts in Europe, he said the European Central Bank is in a position from which it could launch a quantitative easing program but he’s seen no indication that they want to go “in that direction.”
Bullard said there is a market misconception about the quality of debt purchased by the Federal Reserve Board as part of its quantitative easing policy, noting that “subprime was dead by the time we started buying.”
“We don’t have as much risk as is perceived out there in the world on our balance sheet,” he said. “We’ve done an analysis about coming up short on revenue in the coming years, but I don’t think that’s likely.”
Bullard ruled out the likelihood of a global double-dip recession.