Removal Of Federal Support Once Economy Firms Up

St. Louis Federal Reserve Bank President James Bullard has mentioned that monetary policy should not be tightened until the economic recovery is well established. One would need to wait till monthly job growth also occurs and unemployment declines. In October, the US unemployment rate rose to a whooping 10.2 percent.

Last December, the Fed had reduced the funds rate to almost zero along with a liquidity pumping exercise to contain the fallout of the worst financial situation since the Great Depression. Bullard opines that selling back assets acquired by the Fed could precede raising funds rate.

While some Fed officials counter this as asset sales could push interest rates up, Bullard feels that proper planning can prevent this. Bullard feels there is some chance of deflation while for 2009-10 the main worry would be in getting out of recession. Growth of 3.5 – 4% is expected next year, with unemployment reducing by 1.5 points over 2010. There were worries also that low interest rates would fuel asset price bubbles with the Fed’s balance sheet doubling to more than $2 billion, which could cause inflation.