St. Louis Feds Bullard Says U.S. Monetary Policy Is Considerably Easier Today Than in 2012


Starkville, Miss. (PRWEB) February 14, 2013

Federal Reserve Bank of St. Louis President James Bullard gave remarks Thursday on U.S. Monetary Policy: Easier Than You Think It Is, at a special banking forum sponsored by Mississippi State Universitys Department of Finance and Economics.

During his presentation, Bullard discussed recent changes to U.S. monetary policy and his view of how the stance of monetary policy has been altered. On the Feds nominal interest rate policy, he noted that the policy rate has been near zero since December 2008 and that the Federal Open Market Committee (FOMC) has promised to maintain the near-zero rate into the future, so-called forward guidance. In December 2012, the FOMC replaced the fixed-date forward guidance with a threshold approach. The threshold approach has disposed of the pessimistic signal that was a side effect of the date-based forward guidance. This should make the forward guidance more effective, he said.

Regarding the Feds balance sheet policy, outright asset purchases have replaced the Operation Twist program, which Bullard noted may not have been as effective as hoped. Open-ended outright purchases are a more potent tool, he said. Furthermore, he stated that the FOMC has promised to maintain an aggressive asset purchase program, and he discussed some considerations for the future of this program.

Overall, the current stance of U.S. monetary policy is considerably easier than it was in 2012, Bullard said. 2012 policy was characterized by a relatively weak Operation Twist program combined with somewhat counterproductive date-based forward guidance, he said. In contrast, 2013 is characterized by a relatively potent open-ended outright asset purchase program combined with more effective threshold-based forward guidance.

Thresholds and the Policy Rate

Before December, the FOMC stated that the policy rate would likely remain near zero until mid-2015. This created a pessimism problem for the Committee, Bullard said. He explained that the date could be interpreted as a statement that the U.S. economy is likely to perform poorly until that time, which he has called an unwarranted pessimistic signal. However, he said, The Committee did not intend to send such a signal.

Rather than using a given date, Bullard noted that the FOMC has now changed its forward guidance to a description of economic conditions at the time of the first rate increase. Such a dependency on economic conditions is known as state-contingent policy.

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