Market Overview

Fed's Bullard Sets the Bar High for QE3

The St. Louis Federal Reserve President James Bullard spoke in Little Rock on Friday. In his speech, he said that the Fed has launched numerous new policies to stave off crisis and that the bar remains high for another round of quantitative easing. Speaking at the Little Rock branch of the Fed, Bullard said that only the risk of deflation and recession would prompt another round of easing.

Bullard notes that extraordinarily easy policies remain in place, including the enlarged Fed balance sheet, Operation Twist, and near-zero interest rates. "In short, current monetary policy remains ultra-easy and is likely appropriately calibrated to the current situation," Bullard said.

He noted that, based on his calculations, yields would normally be considerably higher given current macroeconomic conditions. He attributes part of this to the continued turmoil in Europe and also partly to the effectiveness of Fed policies.

He advocated the introduction of a quarterly monetary policy report by the Fed. That report could increase the Fed's transparency with the public. "FOMC communications could be improved further by producing a quarterly monetary policy report (QMPR) similar to those produced by other central banks," he said.

Bullard advocates for the Fed publishing a report similar to the Bank of England's Inflation Report, a quarterly report encompassing the Bank's views on the economy. He says that such a report could coincide with Chairman Bernanke's quarterly testimonies and could provide more clarity into the Fed's views on economic issues, as well as create a formal outlet for members who dissent from consensus to voice his/her opinions.

The Fed has been trying to become more transparent since the onset of the financial crisis, using targeted language in statements and other methods to keep markets better tuned to the Fed's views. Chairman Bernanke has increased the frequency of press conferences as well as used new language in official Fed statements to increase clarity. Earlier this year, the Fed began releasing individual members' forecasts of the economy, not just the consensus forecasts as had been done previously. A new, quarterly report would be another step towards Fed transparency.

Commenting on the European Debt Crisis, Bullard said that the crisis is not one that monetary policy can heal; rather, it requires more work from fiscal authorities to solve the crisis. "Debt problems take a long time to work out, so we should expect a drawn-out adjustment process in Europe."

Lastly, on unemployment and inflation, Bullard noted that the economy has made great strides over the past year. Unemployment fell by 0.8 percentage points from May 2011 to May 2012 and inflation has remained near trend. He noted that in Japan in the 1990's and the U.S. in the 1930's (other historical periods after financial crises) inflation had stayed below trend, and he points this out as a positive result of Fed policy.

Markets have been slowly anticipating further Fed easing. Recent slowdowns in leading indicators have caused many analysts to call for further Fed action. At its June meeting, the Fed pledged to extend Operation Twist through the rest of 2012, even as some expected another round of quantitative easing. Analysts, such as those at Credit Suisse, still expect further balance sheet expansion later in the year. In a report released Friday, Credit Suisse said that the eventual crisis solutions in Europe will involve the expansion of the ECB's balance sheet. They have also been advocating globally coordinated easing efforts by central banks for some time now.

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