MONTREAL – Federal Reserve Bank of St. Louis President James Bullard gave remarks Monday on “The U.S. Economy and Monetary Policy,” as part of a panel discussion at the 19th Annual Conference of Montreal, which was organized by the International Economic Forum of the Americas.
During his presentation, Bullard discussed some aspects of U.S. economic performance, noting that it can be characterized by slow but steady growth, improving labor markets and limited financial market excess at this point. However, “Inflation in the U.S. has surprised to the downside,” Bullard added. “This configuration of data suggests that the Federal Open Market Committee (FOMC) can continue to pursue its aggressive asset purchase program,” he said.
The U.S. Economy
Bullard noted that labor markets in the U.S. have improved relative to the data that were available when the FOMC decided to initiate its QE3 program in September. For instance, nonfarm payroll employment grew by an average of 190,000 per month from September 2012 to May 2013, up from an average of 141,200 per month from March 2012 to August 2012.
While labor markets have been improving, inflation has been surprisingly low, Bullard said. Commodity prices globally have been soft over the past year, he noted, explaining that this may be due in part to the recession in Europe and slower-than-expected growth in China. However, he added that core inflation (which excludes food and energy prices) has also been low in the U.S. “Low inflation may give the FOMC more leeway to continue its aggressive asset purchase program,” Bullard said.
He noted that the Fed remains vigilant about the potential for financial market excess in the U.S. “An important concern for the FOMC is that low interest rates can be associated with excessive risk-taking in financial markets,” Bullard said. “So far, it appears that this type of activity has been limited since the end of the recession in 2009.” While the Dodd-Frank Act is meant to help contain some dimensions of this activity, “Still, this issue bears careful watching: Both the 1990s and the 2000s were characterized by very large asset bubbles,” he added.
U.S. Monetary Policy
Turning to monetary policy, Bullard noted that the FOMC is currently authorizing asset purchases of $85 billion per month through its QE3 program. He added that the flow rate of purchases is now widely regarded as the key aspect of meeting-to-meeting policy choices.
“Labor market conditions have improved since last summer, suggesting the Committee could slow the pace of purchases, but surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame,” Bullard concluded.