(Updates with more comments from Bullard, adds byline)
By Kristina Cooke
NEW YORK Feb 17 The Federal Reserve needs a
more systematic approach to expanding U.S. money supply to
avoid deflation as it combats a global recession that looks
likely to last at least through the first half of 2009, a top
Fed official said on Tuesday.
"A key near-term risk for 2009 is disinflation and possibly
deflation," St Louis Federal Reserve President James Bullard
said to the New York Association for Business Economics.
"While the monetary base has expanded at an extraordinary
fast pace during the fall and winter, much of that expansion
has been closely related to the Fed's lender of last resort
function, and cannot be counted on to keep expectations of
disinflation and deflation at bay."
"Because of this, the Fed needs a more systematic method of
keeping the persistent component of monetary base growth rates
elevated in order to combat the risk of a deflationary trap."
The U.S. central bank has lowered interest rates almost to
zero and pumped hundreds of billions of dollars into financial
markets in its efforts to unfreeze credit markets and battle a
"I believe it is fair to conclude we are entering an
extended period of exceptionally low policy rates globally,"
said Bullard, who does not have a vote on the Fed's
policy-setting committee this year.
"In the United States, the setting of nominal interest rate
targets as a monetary policy tool will be off the table for
some time." Given the extraordinary circumstances, he said, the
Fed should "provide a credible nominal anchor for the
He said the Fed could set quantitative targets for monetary
policy, "beginning with the growth rate of the monetary base."
Bullard said he expected U.S. output and employment to
continue to shrink in the first half of 2009, adding that the
global recession promises to continue at least through that
time period. He said it would be "reasonable to say" core
inflation is running at zero to slightly negative rates.
Given the diverging inflation expectations, it would be a
good time to set an inflation target, Bullard told reporters
after his speech. He had previously told the audience that it
would be useful for the Fed to have a policy to get inflation
back to around an "unofficial" inflation target of 2 percent.
Through a number of unconventional monetary policy measures
the Fed has more than doubled its balance sheet to around $2
trillion. Much of the expansion is driven by temporary
programs, such as the Term Auction Facility (TAF).
However, some of the programs could be longer lasting,
including the Fed's purchases of agency debt and agency
mortgage-backed securities, Bullard said. It is also about to
launch the Term Asset Backed Securities Loan Program, which
will target auto loans, credit cards and student loans.
"While the programs may help, we remain far from the
systematic approach I would like to see," said Bullard.
Bullard said that the idea of the Fed buying longer-dated
Treasury debt is "still on the table", but said he would prefer
to first see how other lending programs, such as agency debt
purchases, play out. He said it could take "through spring" to
gauge the impact of the other lending programs.
(Reporting by Kristina Cooke, Editing by Chizu Nomiyama)