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2012-02-07

Fed’s Bullard Warns on “Looming Disaster” in the U.S.

James Bullard, President of the Federal Reserve Bank of St. Louis, urged the U.S. central bank to begin raising interest rates in 2013 to a “normal level” in comments to reporters on Monday.
Bullard – who this year is a non-voting member of the Federal Open Market Committee (FOMC) – stated that “It’s important to start to remove accommodation – even when you go up to 1 percent or 1-1/2 percent, that’s still very easy monetary policy. It’s a matter of getting to a normal level of interest rates at the right time. I don’t think you want to wait until everything is exactly the way you’d expect it to be,” according to a report from Reuters.

The St. Louis Fed President went on to criticize the central banks’ view that the economy is suffering from an “output gap” that can be alleviated only with record low interest rates.  ”If we continue using this interpretation of events,” Bullard contended, “it may be very difficult for the U.S. to ever move off of the zero lower bound on nominal interest rates. This could be a looming disaster for the United States.”

Bullard later cited the Fed’s monetary policies in the 1970s in support of his argument, noting that “This is an important development, as it may prevent the U.S. from repeating the mistakes of the 1970s, in which a misreading of the size of the output gap led the Fed to maintain easy monetary policies for far too long.”

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