The Fed’s Bullard Thinks Inflation Is Dangerously Low

CNNMoney, April 17, 2013. All Rights Reserved.

Cue the flashback to summer 2010. Ben Bernanke and other officials at the Federal Reserve were warning that inflation was approaching dangerous lows, perhaps even flirting with the dreaded "D" word — deflation. Bernanke gave a key speech in Jackson Hole that August hinting that more Fed stimulus might be in the pipeline. Sure enough, it was. The Fed launched QE2 about two months later.

A similar murmur is starting up again: Could inflation be getting too low? St. Louis Fed President James Bullard thinks so.

"Inflation is pretty low right now, and it’s been drifting down," he told reporters at a Levy Economics Institute event Wednesday morning.

"If it doesn’t start to turn around soon, I think we’ll have to rethink where we stand on our policy," he added.

The Federal Reserve usually aims to keep inflation around 2% a year, but recently has said it would be willing to tolerate inflation up to 2.5% a year in exchange for a lower unemployment rate. (The unemployment rate has been stuck above 7% for more than four years now.)

Where is the inflation rate currently? It was 1.3% as of February, according to the Fed’s preferred measure, which strips out gas and food prices.

Should it get any lower, Bullard said he would push his Fed colleagues to ramp up their asset purchases. The Fed is currently buying $85 billion a month in Treasuries and mortgage-backed securities, in an attempt to lower long-term interest rates and stimulate more spending.

The policy has no official end-date, but Bernanke has made it clear that the Fed can adjust its purchasing depending on economic activity. Fed watchers mostly interpreted that language as a sign that the Fed may taper down its purchases later this year. Few have been discussing the possibility that the Fed may do just the opposite, increasing its purchases in the coming months.

Bullard made it clear that he thinks more purchases are a possibility. In his scrum with reporters Wednesday, he repeated multiple times that he’s "willing" to "defend" the Fed’s inflation target from the low side — meaning, if inflation gets uncomfortably below the Fed’s 2% long-term goal.