Fed mulling over moves to combat weak US economy
Bond buying and quantitative easing considered if deflation makes a return
THE US Federal Reserve could buy more bonds or make a commitment on the size of its balance sheet if the economy weakens and deflation reappears, though the time is not yet right for such moves, a senior Fed official said in Japan's 'Nikkei' newspaper.
The remarks from St Louis Fed president James Bullard laid out what many economists have said are the most likely remaining options available to the central bank.
With the global economy sputtering and volatility in financial markets on the rise, some investors are looking to the Fed for assurance.
"If we did do QE3, then I've advocated that we do it on a meeting-by-meeting basis and that we add to our purchases based on the conditions at the particular meetings and that we not commit to a long string of purchases," Mr Bullard said yesterday, referring to a third round of quantitative easing.
Economists said the Fed was likely to wait before taking further steps as it has already exhausted many policy tools.
Mr Bullard said the central bank has already implemented a very easy monetary policy and that the risk of inflation has increased in the United States.
The head of the St Louis branch does not have a vote on the policy-setting Federal Open Market Committee this year.
Traders are waiting for a speech by Fed chairman Ben Bernanke on Friday in Jackson Hole, Wyoming, at an annual gathering of policymakers and academics, with shares moving higher on the back of hope Bernanke will announce QE3.
Recent market turmoil and signs of weaker US growth have boosted expectations that Mr Bernanke may hint at more emergency stimuli.
Interest rates are already near zero, and the central bank's policy-setting FOMC meeting just two-weeks ago signalled it is willing to hold borrowing costs at rock bottom levels for two years if necessary.
There is little more that can be achieved using rates.
Mr Bullard, known for his hawkish views, said the Fed's ultra-easy policy has already raised consumer prices and inflation expectations. Still, he said the Fed could take further steps if needed.
"We could lower the interest rate on excess reserves," he said. "We could do an operation 'twist' where we substitute longer bonds for shorter notes and bills. We can make a commitment on the size of the balance sheet."
At last year's meeting in Jackson Hole, Mr Bernanke hinted at what eventually became a $600bn (€415bn) quantitative easing bond-buying programme, known as QE2. But some economists said Mr Bernanke may hold off on aggressive easing plans this year.
Mr Bullard said he expects stronger growth in the second half of 2011 and going into 2012.
"I would still think that the baseline would be for two-and-a-half per cent real growth in the US over the second half of 2011," he said.
"If the economy weakens substantially, and especially if the inflation picture starts to deteriorate so that deflation becomes a risk again, then I think the committee would definitely take action." (Reuters)