Bullard says Fed may need to buy more Treasuries

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Bullard says Fed may need to buy more Treasuries

By Pedro Nicolaci da Costa Pedro Nicolaci Da Costa – 11 mins ago

ROGERS, Arkansas (Reuters) – The Federal Reserve may need to ramp up its

purchases of U.S. Treasury debt if price levels in the U.S. economy continue to

show signs of softening, St. Louis Fed President Bullard said on Thursday.

Bullard said such actions were not yet warranted given expectations for a

continued economic expansion. But he added that, if further signs of easing

price pressures were to emerge, the central bank should not shy away from

action.

" Should economic developments suggest increased disinflation risk, purchases of

Treasury securities in excess of those required to keep the size of the balance

sheet constant may be warranted, " he said in prepared remarks.

His comments came on the same day as a very weak batch of data renewed growth

worries, sending stocks sharply lower.

In a significant policy shift last week, the Fed announced it would begin using

the proceeds from maturing mortgage securities in its portfolio to buy Treasury

notes, an effort to prevent monetary conditions from slowly tightening over

time.

The move was aimed at sustaining an economic recovery that looks increasingly

troubled, with persistently high unemployment and a battered housing market

denting consumer confidence and inhibiting business investment.

Bullard suggested that measure was enough for now, taking comfort in inflation

expectations that he described as low but manageable. Any additional Treasury

buying should be undertaken in a measured, deliberate manner, he said,

commensurate with the magnitude of the deflation threat.

" Large, sudden purchases rarely are optimal, " he said. " 'Shock and awe' is

almost never a good way to proceed. "

DEAD END

Asked about the possibility that the Fed would lower the interest it pays on

banks' excess reserves, currently at 0.25 percent, as a further step to

stimulate growth, Bullard suggested the impact might be too small.

" I don't think it would be particularly effective. It's kind of a dead-end

policy, you can only do it once, " he said.

In response to the worst financial crisis since the Great Depression, the Fed

not only slashed interest rates close to zero but also bought over $1.5 trillion

in mortgage and Treasury securities.

Following a deep recession, the U.S. economy has been growing for four straight

quarters. However, the expansion was already losing steam in the second quarter,

and many fear the second half of the year will be even more lackluster.

Against that backdrop, core inflation measures, which exclude volatile food and

energy prices and are therefore favored by Fed officials, remain stuck at their

lowest levels in over 40 years.

Once seen as an inflation hawk, Bullard rattled financial markets last month

when he flagged a growing risk of deflation, a damaging vicious cycle of falling

prices and wages that has plagued Japan for about two decades.

At the time, Bullard argued in an academic paper that the Fed's commitment to

keeping interest rates at very low levels for an extended period might actually

increase rather than abate the threat of deflation if it leads consumers and

businesses to anticipate lower prices in the future.

Bullard said Europe's debt crisis, which dominated attention in financial

markets during the spring, appeared to have receded. But he added that it could

resurface if countries failed to make good on their promises to rein in budget

deficits.

(Reporting by Pedro Nicolaci da Costa; Editing by Ricci and Todd Eastham)

[Guest guest]

In other words, the Wunderkinds have gotten us in a really deep hole and they don't know how to get us out again, so they keep digging. Probably if they left everything alone as it is now for a year or two and let everyone adjust to what was happening and be able to plan more than a few days into the future, then it would sort itself out. If the money supply was left alone, the regulations, taxes and other laws left alone, we'd be better off. Its hard enough to hit a moving target (economic goals moving into the future) but when you add in all the axes of movement from those things above, it becomes impossible.

I'm really thinking what aught to happen is the abolish the Fed and just have the treasury expand the money supply by about 3% per year. What that would do is allow for some expansion but rein in super hot expansion and at the same time put money into the economy in bad times. Mostly though it would be a predictable thing and plans could be made accordingly. Add to that a flat tax that can only be changed with a 60% vote from Congress, and a requirement of a cost-benefit analysis of all regulations and such going out at least 15 years, and basically getting the government out of the way and to punishing actual wrong-doing rather than making all businesses criminals by nature of the laws themselves rather than their actions, and again we'd be better off.

In a message dated 8/19/2010 3:37:22 P.M. Eastern Daylight Time, no_reply writes:

Bullard says Fed may need to buy more Treasuries

[Guest guest]

" In other words, the Wunderkinds have gotten us in a really deep hole and they

don't know how to get us out again, so they keep digging. "

In other words, rather than perpetuating the illusion that the country isn't

bankrupt, they could let us be bankrupt now so that they would actually be

forced to reform the system. But that won't happen, because there is an

election coming up.

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