Fed’s Bullard- asset purchases have normal effect

* Bullard: Asset buys’ market effect entirely conventional

* Effect on real economy likely to be just as normal

* Economy on a disinflationary path

* Bullard a voter on Fed policy this year

(Adds Bullard comments, background)

By Kristina Cooke and Edward Krudy

NEW YORK, Nov 8 (BestGrowthStock) – A top U.S. Federal Reserve
official on Monday hit back at critics who argue that the
central bank’s asset purchase program won’t work, saying it
should be as effective as traditional monetary policy.

James Bullard, president of the St. Louis Federal Reserve
Bank, said the likely benefits of the Fed’s decision last week
to buy an additional $600 billion of Treasury bonds by mid-2011
outweighed the costs.

Bullard said that the U.S. recovery has slowed, putting it
in a disinflationary trend that must be addressed to avoid
following the same path as Japan, which has been battling
deflation for years.

“While asset purchases are sometimes viewed as
unconventional, the financial market effects have been entirely
conventional,” said Bullard, who has a vote on Fed policy this
year.

Real interest rates declined, inflation expectations rose,
the dollar fell and equity prices rose as a result of the Fed’s
action, he said, according to slides from a presentation
prepared for delivery in New York.

He said while it is more difficult to weed out the impact
on the broader economy, this is a typical problem for monetary
policy.

“Most likely, the real effects will be just as conventional
as the financial market effects,” he said.

It takes 6 to 12 months for an easing of monetary policy to
affect output, consumption and investment, he said.

Bullard said it was important that the Fed defend its
“implicit inflation target from the low side as we would from
the high side.”

The Fed’s implicit inflation target is around 1.7 percent
to 2 percent.

Bullard said worries that the Fed’s policy could create
high inflation down the road were “legitimate and important,”
but the disinflationary trend “is worrisome right now.”

With interest rates already near zero, further disinflation
would mean higher real interest rates — or a tightening of
monetary policy even as the recovery slows.

Bullard said concerns that the Fed is monetizing, or
inflating away the U.S. deficit were misplaced, as the Fed has
often said it will return its balance sheet to normal over
time.

He said it was “absolutely imperative” that Congress and
the administration tackle U.S. budget problems in the long
run.

“Europe has given the U.S. an important wake-up call on how
devastating it can be to leave long-run structural deficit
problems unaddressed,” he said.
(Editing by Padraic Cassidy)

Fed’s Bullard- asset purchases have normal effect