UPDATE 2-Bullard says Fed may need to buy more Treasuries

(Adds comments on interest on reserves, background)

By Pedro Nicolaci da Costa

ROGERS, Ark., Aug 19 (BestGrowthStock) – The Federal Reserve may
need to ramp up its purchases of U.S. Treasury debt if price
levels in the U.S. economy continue to show signs of softening,
St. Louis Fed President James Bullard said on Thursday.

Bullard said such actions were not yet warranted given
expectations for a continued economic expansion. But he added
that, if further signs of easing price pressures were to
emerge, the central bank should not shy away from action.

“Should economic developments suggest increased
disinflation risk, purchases of Treasury securities in excess
of those required to keep the size of the balance sheet
constant may be warranted,” he said in prepared remarks.

His comments came on the same day as a very weak batch of
data renewed growth worries, sending stocks sharply lower.
[ID:nN19350083] [.N]

In a significant policy shift last week, the Fed announced
it would begin using the proceeds from maturing mortgage
securities in its portfolio to buy Treasury notes, an effort to
prevent monetary conditions from slowly tightening over time.

The move was aimed at sustaining an economic recovery that
looks increasingly troubled, with persistently high
unemployment and a battered housing market denting consumer
confidence and inhibiting business investment.

Bullard suggested that measure was enough for now, taking
comfort in inflation expectations that he described as low but
manageable. Any additional Treasury buying should be undertaken
in a measured, deliberate manner, he said, commensurate with
the magnitude of the deflation threat.

“Large, sudden purchases rarely are optimal,” he said.
“‘Shock and awe’ is almost never a good way to proceed.”


Asked about the possibility that the Fed would lower the
interest it pays on banks’ excess reserves, currently at 0.25
percent, as a further step to stimulate growth, Bullard
suggested the impact might be too small.

“I don’t think it would be particularly effective. It’s
kind of a dead-end policy, you can only do it once,” he said.

In response to the worst financial crisis since the Great
Depression, the Fed not only slashed interest rates close to
zero but also bought over $1.5 trillion in mortgage and
Treasury securities.

Following a deep recession, the U.S. economy has been
growing for four straight quarters. However, the expansion was
already losing steam in the second quarter, and many fear the
second half of the year will be even more lackluster.

Against that backdrop, core inflation measures, which
exclude volatile food and energy prices and are therefore
favored by Fed officials, remain stuck at their lowest levels
in over 40 years.

Once seen as an inflation hawk, Bullard rattled financial
markets last month when he flagged a growing risk of deflation,
a damaging vicious cycle of falling prices and wages that has
plagued Japan for about two decades.

At the time, Bullard argued in an academic paper that the
Fed’s commitment to keeping interest rates at very low levels
for an extended period might actually increase rather than
abate the threat of deflation if it leads consumers and
businesses to anticipate lower prices in the future.

Bullard said Europe’s debt crisis, which dominated
attention in financial markets during the spring, appeared to
have receded. But he added that it could resurface if countries
failed to make good on their promises to rein in budget
(Reporting by Pedro Nicolaci da Costa; Editing by Andrea
Ricci and Todd Eastham)

UPDATE 2-Bullard says Fed may need to buy more Treasuries