Fed’s Bullard Says He’s Ready to Increase QE as Inflation Is “Too Low”

St. Louis Fed President James Bullard spoke in New York on Wednesday, warning that inflation remains too low and suggesting he’d be ready to increase the rate of asset purchases, or QE, to defend their target “from below.”

Making sure to dispel any rumors of the Federal Reserve looking to tighten its monetary stance any time soon, St. Louis Fed chief Bullard told academics easy money is here to stay. The Fed has “room to maneuver,” and the capacity to increase its rate of purchases, Bullard explained at the Levy Economic Institute’s Minsky Conference, adding that quantitative easing is a better tool than forward guidance to signal the central bank’s intention to markets.

It’s commonplace these days to attribute recent risk asset strength to the Bernanke Fed. Even the International Monetary Fund is doing it. Market participants have been nervous about the future path of Fed policy, which has sent U.S. stocks to record highs, particularly as recent FOMC minutes seem to suggest consensus within the committee, which has supported Ben Bernanke’s expansive policies consistently, might begin to break.

Bullard was sure to dispel those rumors as well, noting that as Fed transparency has gone up, subtle differences in opinion have surfaced. “I don’t think there has been any breakdown of consensus,” said the St. Louis Fed boss, who didn’t dissent last meeting, adding there are “nuanced positions.”

Interestingly Bullard suggested strong unemployment targets shouldn’t be part of policymakers’ toolkit. “Should the Fed, or any central bank, put more weight on unemployment than price stability?” he asked the crowd, before presenting research by economists Ravenna and Walsh suggesting that those targets would further distort labor markets. The Fed currently has a soft target for both inflation and the unemployment rate.

Instead, central bankers should focus on price stability, as monetary policy is too “blunt” of an instrument to target the intricacies of the labor market. As mentioned above, Bullard did say QE is a more direct, and preferable way, for the Fed to act (given nominal rates in the zero range and forward guidance as the other major tool), but said he sees asset purchases affecting labor markets in the same way as interest rate moves.

 

Bullard’s bullishness wasn’t enough to boost markets, though. Wall Street was a sea of red at 11:32 AM in New York, with all three major equity indexes well in the red. The Nasdaq led the way, down 1.9%, followed by the S&P 500 and the Dow, which lost 1.6% and 1% respectively. Gold slid to $1,385.50 an ounce while the yield on 10-year Treasuries stood at 1.57%.

 

Asked about the huge amount of excess reserves sitting at the Fed, rather than being lent out by the banks, Bullard chose to speak of the possibility to tighten policy through interest. Depositary institutions like JPMorgan Chase, Bank of New York Mellon, and Citigroup, among others, have nearly $1.7 trillion sitting at the Fed, according to the St. Louis Fed, yet they have been criticized for failing to lend those out, given tighter credit markets and lower loan demand amid a slow economy.

The so-called Bernanke put has been one of the major factors helping investors jump back into the market and prop asset prices to new highs. While there has been dissent within the Federal Reserve, Bernanke has always reaffirmed his intention to pursue his easy policies. Bullard seems to agree, even though he does suggest the flow rate, or pace, of asset purchases, should be the way for them to signal their intentions to markets. Still, it seems, QE is here to stay.