Federal Reserve Bank of St. Louis President James Bullard said the U.S. and world economies risk elevated inflation that persists for years should developed nations mistime their exits from easy monetary policies.
"Once inflation gets out of control, it takes a long, long time to fix it," Bullard said in a Bloomberg Television interview in Hong Kong today. "Ultra-easy" policies across the Group of Seven nations, which include the U.S. and Germany, may be retained for too long, he said.
U.S. monetary policy may be at a "turning point" and the Fed's first interest-rate increase since the global financial crisis could come as soon as late 2013, Bullard said in a speech earlier today. That view contrasts with a debate among Fed policy makers on whether more stimulus is needed even after the U.S. economy accelerated and the unemployment rate fell.
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Over the decades, central banks are "known for overstaying their welcome on policies" and the hardest thing for policy makers is picking turning points, he said in the interview at a Credit Suisse Group AG investment conference. "There's some risk that you lock in this policy for too long a period." Bullard cited a protracted fight with inflation by Paul Volcker, Fed chairman from 1979 to 1987.
In the U.S., consumer prices rose 2.9 percent in February from a year earlier, while in Germany the rate was 2.3 percent.
The Fed's preferred inflation gauge — the core personal-consumption expenditures price index, which strips out food and energy — rose 1.9 percent in the year ended January. Fed officials have set an explicit inflation target of 2 percent.
In Germany, European Central Bank board member Joerg Asmussen said policy makers must start to plan an exit from emergency-lending measures that have pumped more than 1 trillion euros ($1.3 trillion) into the banking system, Die Zeit newspaper reported this week, citing an interview.
"The timing of the exit depends on developments in financial markets," Asmussen said, according to Die Zeit. "Clearly it is still too early to begin, but we must start to carefully prepare the exit." One shouldn't assume the ECB will make any more three-year loans to banks, Asmussen was quoted as saying.
Fed Chairman Ben S. Bernanke said yesterday that public expectations for inflation to remain low give the central bank leeway to maintain record monetary easing. He and other policy makers said last week in a statement that economic slack and subdued inflation will probably warrant keeping the main interest rate at close to zero at least through late 2014.
Bullard, 51, doesn't vote on monetary policy this year. He was the first Fed official in 2010 to call for a second round of asset purchases by the central bank. The Fed pushed down its target interest rate close to zero in December 2008 and has engaged in two rounds of asset purchases totaling $2.3 trillion to boost the economy.
New York Fed President William C. Dudley said March 19 that while economic reports have improved, it's "far too soon to conclude that we are out of the woods" and "nothing has been decided" on more bond purchases. Dallas Fed President Richard Fisher, in a Fox Business Network interview yesterday, said he opposed more purchases with the economy strengthening.
The number of Americans saying the U.S. economy is getting better rose in March to the highest level since 2004, according to Bloomberg's consumer index yesterday. Figures from the Labor Department showed jobless claims decreased by 5,000 to 348,000 in the week ended March 17, the fewest in about four years.
The U.S. economy expanded at a 3 percent annual rate in the fourth quarter, the fastest pace in more than a year, as households spent more freely, the government reported. Growth will probably slow to 2 percent this quarter, according to the median of 72 economists' forecasts in a Bloomberg News survey from March 9 to March 13.
About 1.2 million jobs were created in the past six months, the most since the same period ended May 2006, Labor Department figures show. The unemployment rate held in February at a three- year-low of 8.3 percent.
Bloomberg News
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