Fed’s Bullard speaks on policy debate in Prague

PRAGUE (Reuters) – U.S. policymakers may not be willing or able to wait for all global uncertainties to be resolved before they begin normalizing loose monetary policy, St. Louis Federal Reserve President James Bullard said on Tuesday.

Following are comments from Bullard during a speech and on the sidelines at a banking conference in the Czech capital.

ON NORMALISING POLICY

“Because we are so accommodative right now, the FOMC may not be willing or able to wait until every single global uncertainty is resolved before we can begin normalizing policy.”

“If we wait too long we will get a lot of inflation in the United States and around the world.”

ON REVERSING EASING

“I think as long as these uncertainties remain unresolved … if that’s the case, I think we could pull up just a little bit shy of our total of $600 billion and I think by doing that we could begin the process toward normalization, we could go on pause for a little while and see how the economy develops through the summer.”

“If the economy develops as I hope and think it will be during 2011, I think it will be time for us to start to reverse our ultra-aggressive and ultra-easy monetary policy.”

“I’m just talking for myself. I think it could be on the order of $100 billion less than what we had initially thought, but I would leave that up to how the rest of the committee would want.”

“There’s also the issue of tapering so you could sort of slow down the pace (of) the purchases, and that is being debated by the committee.”

“I think tapering worked fine at the end of the NBS program, so I see no reason why we wouldn’t taper this time as well. But I see from public comments there seems to be some difference of opinion on that.”

“Some people both in markets and in the committee think it will be just fine to end the program.” “Suppose we didn’t purchase the full $600 billion and you only purchased $500 billion, you’ve still got a gigantic balance sheet and you’ve still got a policy rate near zero, so it would just be a tiny move in the direction of trying to normalize policy, but policy overall would still be in the direction of accommodative.”

“One of the things that I’m concerned about is that policy is so easy right now, that we have to get started on the process of getting back to normal, because it will take a long time to get back to normal.”

* When asked if he meant now, he said:

“Yeah, we are still buying treasuries. We are feeding the fire at this moment. We know there is a lot of lag on monetary policy, so we have to start thinking about turning this around in the near future.”

BULLARD’S PREFERRED PROCESS OF EASING

“We’re purchasing securities at a rapid rate. If we stop that process and we just let the balance sheet stay at a high level and keep the policy rate near zero, and keep our extended period language, we could pause for a couple of meetings like that. And then we could start to take other measures to start to reduce the size of the balance sheet, to think about possible language changes with the extended period, to eventually get the policy rate off zero.”

“That’s my preferred sequence.” “The balance sheet doesn’t have to come all the way back to normal before we can start raising interest rates. That is a complication of this tightening cycle that has not been around in previous tightening cycles.”

MARKET REACTION TO TIGHTENING

“Obviously if you start to reverse, all the effects will go into reverse, but that is just normal tightening of monetary policy. If you start to raise rates, if you start to tighten monetary policy as the economy improves so that you don’t get too much inflation in the long run or the medium term.”

“The tightening I am describing will have real effects (on markets), but will be done in the context of an improving economy and will keep inflation right at the target if we do it right.”

ON GROWTH PROSPECTS

“In the United States, the recession officially ended in the summer of 2009, so as 2011 started we were about 18 months past the end of the recession, and that’s about the kind of timing when I would expect the economy to pick up and start growing fairly rapidly.”

“Anecdotal reports are certainly more bullish for both U.S. growth prospects and global growth prospects. There’s a lot of profitable businesses and they have a lot of cash and they have an improving outlook and I think they are looking for more opportunities.”

“Many firms that can tap into the continuing boom in Asia are doing quite well.”

ON U.S. FISCAL SITUATION

“The fiscal situation is very serious and (Fed) chairman (Ben) Bernanke has emphasized this on a number of occasions. It’s really incumbent on Congress to come to an agreement and contain the very large deficits in the U.S., help set the long-term fiscal path to something more sustainable in the US and if you look at the negotiations that are going on, it’s not that clear how they are going to do it.”

“Failure to do that, I think, would be a risk for the U.S. and for the global recovery and I think it’s really important to get an agreement in congress on these issues.”

ON REGULATION

“I would hope that when the dust has settled here, the regulatory burdens on the largest firms in the United States are not so on big that they would drive the companies out of the

U.S.”

“I will also say this about the largest banks in the U.S. They have become even larger during the crisis, and that has become a source of concern in the U.S.”

“It is not just Bank of America, it is Bank of America Merrill Lynch. And it’s not just JP Morgan, it is JP Morgan Bear Sterns. These have gotten very large.”

“I’m concerned we may not have contained the too-big-to-fail problem sufficiently at this point so they are still enjoying to some degree an explicit government support and really continue to work on that problem.”

“If they are going to have implicit government guarantees, then they should be paying a premium for that to the government. If they are not going to have implicit government guarantees then we also have to convince the market that they are going to be allowed to fall if they don’t behave according to market principles.”

“We have got a ways to go still. We are working on it and we’re doing the best we can.”

(Reporting by Jan Lopatka and Michael Winfrey; Editing by Ron Askew)

Fed’s Bullard speaks on policy debate in Prague