Fed’s Bullard sees US debt default as huge risk

ST. LOUIS (Reuters) – Forget reverberations of Japan’s quake, high oil prices and Europe’s debt crisis. The biggest risk to the world economy currently is the U.S. government defaulting on its debt.

At least that’s how St. Louis Federal Reserve Bank President James Bullard sees it.

“The U.S. fiscal situation, if not handled correctly, could turn into a global macro shock,” Bullard said in an interview on Wednesday. “The idea that the U.S. could threaten to default is a dangerous one.”

Some Republican lawmakers have said a brief U.S. default might be an acceptable if it forces the White House to deal with large budget deficits.

Fitch Ratings on Wednesday said it believed a debt limit agreement would be reached, but warned it would downgrade the U.S. sovereign ratings to “restricted default” if the government fails to make payments due in August, when the Treasury has warned it will run out of maneuvers to pay the government’s obligations.

The recent spate of weak U.S. economic data likely will force Bullard to mark down his growth forecast for this year and may prompt the Fed to stay on hold longer after ending its current $600 billion round of bond-buying this month.

The policy-setting panel will want to weigh data at its August and September meetings before deciding on the timing of tightening.

“With the weaker data, it’s fine to tell the story that you think things are going to pick up, but then you are going to want to see some confirmation of that,” Bullard said. “You are going to need some time to get the confirmation before you can decide what to do next.”

A decline in inflation expectations from the first quarter ”takes some pressure off” the need to tighten quickly, he said.

Once enough data comes in to confirm the economy is strengthening, he said, the Fed is likely to start tightening by ending its program to reinvest bond proceeds.