In Europe, a Fed President Urges Quantitative Easing

James Bullard, president of the Federal Reserve Bank of St. Louis and a voting member of the Fed’s policy-setting open markets committee, said Europe’s central bank should consider quantitative easing similar to that undertaken by the Fed — large bond purchases meant to drive down market interest rates.

The public comments were highly unusual. While central bankers from different countries frequently confer in private and offer advice and criticism to their peers behind closed doors, it is rare for any official to go public with even the mildest criticism of another central bank.

But with official interest rates in almost every advanced economy already close to zero, Mr. Bullard said, central bankers must reach for stronger tools to avoid getting trapped in economic doldrums.

“The lesson of Japan is that once you get stuck, it’s very hard to get out,” Mr. Bullard told an audience at Goethe University in Frankfurt. “One way to get stuck would be not to take aggressive action.”

Mr. Bullard sent a message to Wall Street not to expect the Fed to begin rolling back its own quantitative easing program soon, saying that there was no sign of inflation risk, and that even if there were, the central bank could deal with it.

“We just haven’t seen it so far,” Mr. Bullard said of inflation. And when it starts to appear, he added, “we know how to fight that problem — we can raise rates.”

Mr. Bullard spoke ahead of meetings in Frankfurt with some of his European counterparts, including Mario Draghi, the president of the European Central Bank. Mr. Bullard said he was speaking for himself and not the Fed or any other members of its policy committee.

Still, his remarks represented one of the strongest public statements yet from a Washington policy maker in response to increasing concern that European leaders were reacting too timidly to a spreading recession.

A sluggish European economy has global implications, Mr. Bullard said. “You have to be concerned,” he told the group. “The European Union as a whole is the biggest economy in the world.”

A move by the European Central Bank to buy government bonds on a grand scale would certainly face harsh opposition from the Bundesbank, the conservative and influential German central bank that, while officially under the European Central Bank, wields outsize influence because of its historical role as defender of the German currency and as Europe’s bastion of anti-inflation fervor.

The European Central Bank has given no signals that it is seriously considering quantitative easing.

There are also practical hurdles to emulating Fed policy in Europe. There is no pan-European government bond similar to United States Treasuries. Mr. Bullard said the solution would be to buy bonds of all 17 governments in the euro zone in proportion to their size.

With the official euro zone interest rate at a record low of 0.5 percent, below the rate of inflation, the central bank has been groping for ways to stimulate the slumping European economy. Mr. Draghi has floated the idea of a negative deposit rate — in effect charging banks to keep their reserves at the central bank as a way to prod them into lending more money to businesses and consumers.

Mr. Bullard said a negative deposit rate would be a “dead-end policy.” It would not have much effect and could be done only once, he said.

Article source: http://www.nytimes.com/2013/05/22/business/global/in-europe-a-fed-president-urges-quantitative-easing.html?partner=rss&emc=rss