Low-rate trend worries Fed official

LITTLE ROCK — James Bullard, president of the St. Louis branch of the Federal Reserve, said Friday he is worried about the Fed’s policy of almost zero-percent interest rates, which has been in place for more than three years.

The Federal Funds interest rate, the rate at which banks lend money overnight to other banks, is currently at0.25 percent. It is set by the Federal Reserve.

The rate being so low for so long “is way beyond what is normally discussed as a business cycle,” Bullard said Friday at a breakfast speech at the Little Rock Peabody hotel. “A typical business cycle is thought to be six months to a year. During a recovery period, it could be a year or 18 months.”

The low rate policy is projected to be in place for several more years, Bullard told about 115 in attendance at the event.

“If you have a policy that is going on five, six, seven, eight years to 10 years, now it is not business cycles anymore,”Bullard said. “That is a permanent state of the economy. I am worried about this.”

The conventional wisdom is that monetary policy can help the economy in the short run, Michael Pakko, chief economist at the Institute for Economic Advancement at the University of Arkansas at Little Rock, said in a telephone interview. Pakko was a research officer and economist with the St. Louis Fed before he joining UALR in 2009.

“But there is not really a whole lot the Fed can do to boost economic growth in the long run,” Pakko said. “Ultimately, employment is determined by real factors, labor market conditions.”

The low-rate policy is causing other distortions in the economy, Bullard said, including punishing savers.

Still, the Federal Reserve’s overall monetary policy is appropriate, Bullard said. In addition to setting interest rates, the policy also has included “quantitative easing” or increasing the money supply by buying government securities; and “Operation Twist,” which involves the government’s purchase and sale of bonds.

“In short, the current monetary policy remains [conservative] and is likely appropriately calibrated to the current situation,” Bullard said.

There is a risk to over committing to a very conservative fiscal policy, Bullard said. He recalled the era around the 1970s, which included four recessions in 13 years, double digit inflation and double-digit unemployment.

The Fed’s policy now has been appropriate, but it “could reignite a 1970s-type experience globally if it is pursued too quickly,” Bullard said. “There is that risk out there. So the lesson that came from the ’70s is clear: Don’t let the inflation genie out of the bottle. It’s very hard to get back in.”

Pakko said the Fed needs to maintain its institutional memory to remember the1970s so the country doesn’t go through that again.

“The challenge is to make sure that you’re on top of the situation and don’t let that happen again,” Pakko said.

There aren’t easy solutions to the financial turmoil in Europe, where countries are near the point of defaulting on their loans, Bullard said. The countries have borrowed too heavily on international debt markets, he said.

“This is not a problem that monetary policy can remedy,” Bullard said. “Attempts to use monetary policy to fix fiscal problems have historically ended with substantial inflation.”