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.”

New Year 2012 KLCI Relly

The Federal Reserve may alter the language of its monetary policy statement at next month’s Federal Open Market Committee (FOMC) meeting in a move that could keep interest rates at record low levels for longer than previously anticipated.

This morning the Wall Street Journal reported that the Ben Bernanke-led U.S. central bank “could signal it is likely to keep short-term interest rates near zero into 2014 or beyond, to bolster the fragile economic recovery.” The rationale for the change stems from news that “Fed officials have grown increasingly uncomfortable with their August statement that they are likely to hold short-term rates exceptionally low at least through mid-2013. Some believe low inflation and high unemployment could warrant low rates for longer.”

While the Fed funds futures market – which the report points out – is currently forecasting a 50% chance that the Fed will not begin raising rates until January 2014, the aforementioned change to the FOMC statement would provide even more of a tailwind for the price of gold and other U.S.-dollar denominated asset classes.

Fed Minutes Show Growing Divide

The release of the Fed minutes yesterday afternoon revealed a growing divide among Chairman Ben Bernanke and his fellow U.S. central bankers over the proper course of monetary policy.

The Fed minutes – a recap of the Federal Open Market Committee (FOMC) meeting – showed that at the most recent August 9th meeting, several members were in favor of further stimulus while others were concerned that additional rounds of quantitative easing could ignite inflation.