Fed says US economy may allow early end to QE2

US Federal Reserve policy makers should review whether to complete a second round of quantitative-easing purchasing due to end in June because of strong US economic data, Federal Reserve Bank of St Louis President James Bullard said.

“The economy is looking pretty good,” Bullard told reporters in Marseille, France, today. “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short.” While the economy is clearly stronger than last summer and fall and QE should be reviewed, uncertainties remain, including Japan, Middle East political tensions, the US fiscal position and the European sovereign debt crisis, Bullard said. US first-quarter gross domestic product may not be as strong as anticipated several weeks ago, and some strengthening may get pushed into the second quarter, he said.

The US economy grew at a 3.1 per cent annual rate in the fourth quarter, led by a jump in consumer spending that will be hard to match early in the year as energy prices surge. Surging oil prices sparked by turmoil in West Asia may erode consumers’ purchasing power, and supply constraints caused by the Japan earthquake and its aftermath slow the pace of recovery this quarter. “The oil price increases so far is not enough to derail the US recovery at this level,” Bullard said. “If oil prices stabilize where they are, we’ll be fine.” Prices would have to go substantially higher for there to be a “significant and material effect,” he said.

“We have to weigh those in the decision” on whether to stop the Fed’s QE2 program earlier than planned, Bullard said.

Interest rates
US central bankers have said they will keep interest rates near zero for an extended period. In contrast, European Central Bank officials indicated this month that uncertainty caused by Japan’s earthquake may not deter them from raising interest rates next month.

“We’re far away from normal policy,” Bullard said. “I think it’s important to take a few steps back to normality. Even if you make a few small moves, monetary policy will still be accommodative for some time to come.” While the economy may still suffer shocks, the “balance sheet should be contingent” and the Fed should be ready if the economy turns down, he said.