HIGHLIGHTS-Fed’s Bullard speaks on policy debate in Prague

 PRAGUE, March 29 (Reuters) - U.S. policymakers may not be
willing or able to wait for all global uncertainties to be
resolved before they begin normalising 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.
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 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 normalising 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 towards normalisation, 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
programme, 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 programme."
"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 normalise
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)

HIGHLIGHTS-Fed’s Bullard speaks on policy debate in Prague