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Federal Reserve Bank of St. Louis President James Bullard warns against complacency on inflation

By Thomas Frommherz for CEOWORLD Magazine Updated:October 12, 2009

Federal Reserve Bank of St. Louis President James Bullard said Sunday that unemployment is headed into double digits, while the medium-term inflation outlook poses more risk than generally believed, according to reported comments.

“Unemployment is leveling off, but we still may be headed toward double digits,” Bullard was quoted as saying in a Bloomberg report.

According to data released earlier this month, the U.S. unemployment rate hit a 26-year high of 9.8% in September.

During a speech Sunday at the 51st annual meeting of the National Association for Business Economics, St. Louis Fed President James Bullard reaffirmed the need for a Taylor-type policy rule for the Federal Reserve’s asset purchase program. Such a rule would help communicate how asset purchases may be adjusted as economic conditions change, while remaining consistent with the Fed’s goals of ensuring price stability and sustainable economic growth, he said.

Bullard also expressed concern that inflation risks in the medium term may be higher than widely believed. He said that too much emphasis is being given to the idea that the recession implies that the output gap is currently quite large, minimizing the risk of inflation.

He also proposed a different framework for how U.S. monetary policy could be implemented in the future using interest on reserves held at the Fed. A similar structure is already in place at several other central banks.

On current monetary policy, “the key issue is how to think about the asset purchase program,” Bullard said. “Liquidity programs are shrinking, but the asset purchase program is only partially complete.”

He added that while the asset purchase program is considered a successful tool for quantitative easing, it has also caused a large and persistent increase in the monetary base. “This may lead to inflation in the medium-term, depending on markets’ expectations of monetary policy going forward,” Bullard said.

Prior to December 2008, the Fed communicated its monetary policy via adjustments in interest rates. However, with nominal interest rates currently near zero, the likely path of the Fed’s monetary policy is now unclear to financial markets.

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