Tuesday June 30, 05:17 PM
US FED: Bullard-Exit Strategy Needed To Avoid Inflation Expectations
Washington, June 30 - St. Louis Federal Reserve President James Bullard warned today that without an exit strategy, the Fed could face high inflation expectations and rising long term interest rates.
If expectations of inflation feed into todays long-term yields, those yields will rise today and hamper recovery prospects, Bullard said today in a speech at a Global Interdependence Center event held at the Federal Reserve Bank of Philadelphia.
Bullard said that in developing an exit strategy, the Fed should consider three distinct issues: the declining need for liquidity facilities, the ongoing asset purchase program and an exit from zero short-term nominal interest rates.
He said that while some stress in market functioning remains, 'by many metrics financial markets are less strained than they have been.' And with many of the programs now being used less intensively, the Fed's liquidity programs should 'wind down naturally.' Bullard expects the facilities to remain in place until next year, just in case financial turmoil returns.
Bullard warned of medium-term inflation as a result of the Fed's expansion of its monetary base. 'In teaching money and banking, we say permanently doubling the money supply eventually doubles the price level.' He offered a few alternatives to the Fed's purchasing of longer maturity Treasuries, agency debt and Agency MBS. First, he said the Fed could sell assets from its System Open Market Account portfolio to finance purchases. The Fed could also increase the monetary base by using tools for managing reserves, such as paying interest on reserves and conducting reverse repos. Finally, the Fed could allow assets to mature and sell them if inflation becomes a more pressing problem.
Bullard stressed the need for markets to understand that the FOMC, in continuing to state that it will keep the fed funds target rate low for an extended period, means that 'should economic performance improve and inflation begin to rise... the promise is to maintain zero rates longer than might be indicated by simple rules of thumb. It also means that most of the action on monetary policy will be with the asset purchase program in the near term.'
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