Fed's Bullard: Weak Inflation May Argue For More Fed Stimulus

Weak inflation readings may mean the Federal Reserve will have to press forward with its current bond buying stimulus effort for longer than expected. In a recent speech, Federal Reserve Bank of St. Louis President James Bullard portrayed the monetary outlook as being caught between an improving economy and inflation pressures.

By Michael S. Derby
June 10, 2013, 9:50 a.m. ET
Wall Street Journal

NEW YORK--Weak inflation readings may mean the Federal Reserve will have to press forward with its current bond buying stimulus effort for longer than was once expected, a U.S. central bank official said Monday.

In a speech in Montreal, Federal Reserve Bank of St. Louis President James Bullard portrayed the monetary policy outlook as being caught between an improving economic landscape and inflation pressures that continue to ebb ever lower from the central bank's 2% target. As the official sees it, the improvement in the economy may support a slowdown in the pace of bond buying, while the weak inflation readings suggest the Fed will have to continue forward with stimulus. The official is currently a voting member of the monetary policy setting Federal Open Market Committee.

"Labor market conditions have improved since last summer, suggesting the committee could slow the pace of purchases, but surprisingly low inflation readings may mean the committee can maintain its aggressive program over a longer time frame," Mr. Bullard said in a press release that accompanied materials associated with his speech.

Mr. Bullard's address is the last financial markets and the broader public will hear from a central banker on monetary policy ahead of the FOMC meeting scheduled for June 18 and 19. The officials will be meeting amid broad speculation about the fate of the central bank's ongoing $85 billion per month program of bond buying stimulus.

An improving economy has led a number of central bank officials to say that the time may be coming over the next several months where the Fed will have seen enough improvement in the economy to slow the pace of asset purchases. Fed Chairman Ben Bernanke has said it's possible the purchase of Treasury and mortgage bonds could be reduced at one of the next few Fed meetings. Other central bankers, such as the leaders of the New York, San Francisco and Boston Feds, have offered similar views.

Mr. Bullard has been the most prominent advocate for saying the current inflation outlook may argue for asset purchases to continue at their current pace, or be increased. He's reminded observers that it's just as important for the Fed to defend its price target from the low side as it is from the high side. Based on what he sees now with the economy, the data suggests "the FOMC can continue to pursue its aggressive asset purchase program."

Most Fed officials continue to believe that weak price pressures are rooted in temporary factors and believe that over time inflation will move back up to where the central bank wants it to be.

A number of Fed officials have pointed to the relative stability of inflation expectations as evidence that the economy is not developing a deflationary mindset that the central bank would have to counter with easier policy, or a longer course of the current dose of stimulus. Mr. Bullard's comments Monday, in conjunction with past speeches, indicate that the official is not yet ready to call for a more extensive course of stimulus. But it's clear he is one of the Fed officials who is nevertheless most open to pursuing such a path if need be.

Mr. Bullard noted in his prepared remarks that commodity prices, a key driver of inflation, have been "soft" over the last year. He said that may be due to Europe's recession and weaker than expected Chinese growth. But he also noted that price pressures stripped of food and energy are also low, which means the current state of inflation "may give the FOMC more leeway to continue its aggressive asset purchase program."

The policymaker described U.S. growth as "unspectacular" in his speech and he said labor markets have "improved" relative to last August, just before the Fed decided to launch its bond buying stimulus.

The central banker said fears that Fed policy is unsettling financial markets appears misplaced for now. When it comes to excessive risk taking fueled by very easy monetary policy, "it appears that this type of activity has been limited since the end of the recession in 2009."

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