Fed's Bullard: No Good Case for Tapering QE Unless Inflation Rises

FRANKFURT — St. Louis Federal Reserve President James Bullard said Tuesday there will not be a good case for reducing the U.S. Fed's quantitative easing program until inflation begins to rise towards the Fed's target.

While Bullard sounded optimistic on the U.S. economy — maintaining his forecast of 3% GDP growth this year — he noted that inflation has remained stubbornly below the Fed's 2% target, and thus remains his primary reason to favor keeping the Fed's $85 billion asset purchase program in place for the time being.

"Inflation is pretty low in the US. I can't envision a good case for tapering [QE] unless the inflation situation turns around and we're more confident that inflation is going to move back toward target," Bullard said, speaking to reporters after a speech in Frankfurt.

"I'm definitely keeping an eye on the fact that our inflation rate is quite low," he added. "I think that is a major consideration in whether we should taper or not."

Bullard said there was "no good explanation" for the drop in inflation in the United States despite the economic recovery gathering steam. With much of the talk in the U.S. recently being about unemployment, he suggested inflation should be a greater concern.

"I've been surprised that inflation has come down as much as it has, and that's gotten me a bit concerned, because I don't think we have a very good explanation for why that's occurring," he said. "It's got me thinking that maybe we should put a lot of weight on that."

By contrast, Bullard said he was "fairly optimistic" on the prospects for the U.S. economy. He said he expected GDP growth of around 2.5% in the first half, while stronger growth in the second half should push growth to 3% for the year.

"I am optimistic. I think a lot of the headwinds in the U.S. economy are dissipating," Bullard said, arguing the fiscal sequestration has had less of an effect on the economy than many forecasters had expected.

Bullard acknowledged that the recession in Europe is a source of concern for U.S. policymakers.

"You have to be concerned about that. The euro area as a whole is the biggest economy in the world," he said. "Everyone would like to see better growth in Europe than what we have now."

Bullard had earlier in his speech suggested the European Central Bank should consider additional monetary policy accommodation if inflation remains below its own target. He argued the ECB could consider a US-style QE program that would involve bond purchases weighted to the GDP of individual EMU members.

Calling it a "simulated euro-bond approach to quantitative easing," Bullard told reporters he believed it would have a similarly positive effect as QE in the United States.

"I think it would have the same effect, because it's a very broad-based lowering of nominal interest rates," he said.

Speaking of the global push toward low interest rates and monetary accommodation among central banks, Bullard acknowledged there was a risk that such unconventional measures could eventually "blow up," but said the fact that inflation has remained low has eased such fears.

"One of the ways that could happen is that you get a lot of inflation, and we just haven't seen that," he said. Central banks would know how to react — by raising interest rates — should inflation pressures emerge, he affirmed.

"We know how to fight that problem," he said. "Even though I'm an inflation hawk ... the general lesson of the last five years is that inflation has remained very low."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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