LONDON — St. Louis Federal Reserve Bank President James Bullard reiterated Thursday his view that continued quantitative easing is the Fed's best monetary policy option when faced with high unemployment and low inflation.
And he said the Fed should be prepared to adjust its bond purchases as economic data come in.
Once again Bullard, a voting member of the Fed's policymaking Federal Open Market Committee this year, did not indicate in which direction the Fed's $85 billion monthly bond buying should go. On one hand, he observed that inflation is running below the FOMC's 2% target, but on the other hand noted that the unemployment rate has come down despite "relatively slow growth."
Bullard also repeated his advice for the European Central Bank in remarks prepared for delivery to the Official Monetary and Financial Institutions Forum.
He said that if economic problems and low inflation persist in the euro area, the ECB should consider "GDP-weighted quantitative easing."
Bullard, who has voted so far this year to continue $85 billion per month of Fed bond purchases to hold down long-term interest rates, examined an array of policy options for the Fed, including doing nothing and increasing the duration of central bank securities holdings through "Operation Twist."
He said the latter's impact was "probably minor." He had a similar assessment of making the interest rate on excess reserves negative, essentially charging banks for holding reserves with the Fed. However, he said it could be argued that the IOER is "too high" at 25 basis points.
"The extent to which the central bank could charge for the holding of reserves is probably limited," said Bullard. "Effects of moving in this direction are probably minor."
Bullard was also dubious about the benefits of providing "forward guidance" on the path of the federal funds rate, i.e. promising to keep the rate very low even after the economy strengthens. He said this runs the danger of sending a signal of pessimism.
Bullard that other central banks, such as the Bank of England and European Central Bank, had been much more circumspect about using forward guidance.
Bullard concluded that "quantitative easing remains the best monetary policy option in this situation."
"QE is closest to standard monetary policy, involves clear action, and has been effective," he said.
So the Fed's best course, according to Bullard, is to "continue with the present quantitative easing program, adjusting the rate of purchases appropriately in view of incoming data on both real economic performance and inflation."
Bullard said the financial market reaction to the Fed's asset purchases show they have been "effective," working through a number of channels including "(1) higher inflation expectations (2) currency depreciation (3) higher equity valuations (4) lower real interest rates."
He did not elaborate a great deal on his recommendation that the ECB consider GDP-weighted quantitative easing, but said that since there is no single bond market for the whole euro zone, it could buy bonds of individual nations in proportion to the size of their economies.
"This would provide policy accommodation for the Euro area as a whole, with the GDP weights providing a substitute for the lack of a European-wide government bond market," he said.
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