jg – March 24, 2010
MARCH 24, 2010
Bullard: Recovery Is on Track
By KATHLEEN MADIGAN and DEBORAH LYNN BLUMBERG
Wall St. Journal
The U.S. economic recovery is on track and labor data should look better in March and beyond, but more bank failures will occur this year than in 2009, said James Bullard, president of the Federal Reserve Bank of St. Louis.
"The situation is improving," Mr. Bullard said in an interview Monday, adding that "the recovery is on track." Household spending is looking better, and business investment is picking up, he added.
Mr. Bullard said he doesn't expect a V-shaped recovery—meaning rapid economic growth—because of the "damaged" financial sector. He said he expects to see more bank failures this year than next year mainly due to banks' exposure to commercial real estate.
Mr. Bullard, a voting member of the Federal Open Market Committee this year, voiced some optimism on jobs, expecting better labor reports starting in March.
"I think [businesses] will get caught short with not enough workers to meet demand," he said, a situation that could result in hiring from the private sector in addition to the jobs coming from government hiring for the 2010 census.
He expects the unemployment rate to "tick down" throughout the spring, although the drop "won't be dramatic."
On the housing sector, Mr. Bullard said the current data are mixed. "That's making me a little nervous," he said. But he noted that housing activity is skewed in the winter, and that the March to June data are key to see how housing is performing. He expects housing to stay "at low levels," maybe moving sideways or a bit higher. "I certainly don't expect it to boom," he said.
Mr. Bullard also said that though the Fed is on track to end its $1.25 trillion purchase program for mortgage-backed securities, it continues to leave open the option of returning if the housing market needs it.
The Fed has pared down its weekly purchases to about $10 billion, from a high of $25 billion to $30 billion at its peak. The central bank has $14 billion left to purchase in the next couple of weeks, according to latest data from the central bank.
"Yields haven't opened up, and we don't expect much to happen at the end of month, or at the end of program," he said. "All indications are that it's going to be a seamless transition."
The central banker repeated his view that the use of the phrase "extended period" in connection with interest-rate policy has put the Fed in a box. He would prefer switching the wording to show policy decisions will be guided by the data rather than a time limit.
The phrase is "giving a misperception about what the committee really thinks," Mr. Bullard said. "I think we possibly could improve communication by making a move in that direction," of dropping the language, he said. "I think there's probably more support (for that) than you think."
Mr. Bullard defended the Fed's role in overseeing small banks, a task that could be taken away under the new financial reforms being discussed in Congress. "In order to make good monetary policy, you should have good connections to these smaller lenders," he said.
But he said that a "blueprint" is needed for the future of government-backed housing finance giants Fannie Mae and Freddie Mac. "The sooner we deal with them, the better," he said. "Their status right now is hard to get your head around."
Looking ahead, Mr. Bullard said he is confident that Europe will come to an agreement over Greece's fiscal dilemma. He said he also worries about bubbles, but doesn't see one developing now.
One drag on growth could be the adjustments that state governments will have to make to bring their budgets into balance. "No, I don't think it's going to cause a crisis," he said. "But, will it be painful? Yes."