HONG KONG (Reuters) - The U.S. Federal Reserve should be wary about “over-committing” to an ultra-easy monetary policy that has served the economy well in recent years but could be detrimental down the line, a top Fed official said on Friday.
“Some of the further actions that could be undertaken at this juncture would have effects far into the future, in an environment of continual improvement and repair for the U.S. economy,” St. Louis Fed President James Bullard said in remarks prepared for delivery at the Credit Suisse Asian Investment Conference in Hong Kong.
“Overcommitting to the ultra-easy policy could well have detrimental consequences for the U.S. and, by extension, the global economy.”
The Fed has kept rates near zero since December 2008, and has bought $2.3 trillion in bonds to stimulate growth. At its March meeting, the Fed reiterated its view that lackluster growth will require keeping rates near zero through late 2014.
The Fed’s current pause in policy is a good time to take stock of whether it is at a “turning point,” Bullard said.
Bullard, seen as a policy centrist, said he expects the U.S. economy to grow at about 3 percent this year, hardly high growth but potentially fast enough to keep trimming unemployment, he said. U.S. unemployment stood at 8.3 percent in January.
Meanwhile, inflation has risen despite less-than-stellar economic growth, he said, suggesting that the Fed may not have as much leeway to ease without sparking unwanted price rises as many may think.
“The hard-learned lesson of the 1970s was that if the inflation genie is let out of the bottle, it can be extremely difficult to get it back into the bottle,” Bullard said.
Bullard does not have a vote this year on the Fed’s policy-setting committee, but he takes part in the central bank’s regular policy-setting meetings.
Analysts who calculate the U.S. is operating well below its potential output — and therefore that the economy has plenty of room to run before inflation kicks in — may not be taking the bursting of the housing bubble into account, he said.
Filtering out the effects of the bubble, he said, “suggests that the U.S. output gap today is much smaller than commonly believed.”
Advocates of policy easing point to forecasts within the Fed that inflation will fall below the central bank’s 2 percent goal in coming years, giving headroom for pushing borrowing costs lower to boost jobs.
More stimulus is needed, say policy doves like Chicago Fed Bank President Charles Evans, because the economy is not growing at a fast enough clip on its own to reduce uncomfortably high unemployment.
Not so, Bullard countered in Hong Kong Friday.
The relationship between unemployment and GDP growth is clear during downturns, but muddled during expansions, he said.
“This might suggest that the nation does not need rapid growth to see a reduction in unemployment — it only needs to see some positive growth,” he said.
Fed Chairman Ben Bernanke and other policymakers have held the door open for the possibility of further Fed easing.
But analysts now see a third round of bond purchases or quantitative easing as less likely given recent improvement in the economic backdrop, especially in the job market.
Traders are now betting the Fed will begin to raise rates by July 2013, more than a year earlier than the Fed currently projects.
Reporting by Clement Tan; Writing by Ann Saphir; Editing by Edmund Klamann