2nd Fed Official Sheds Doubt on ‘Extended’ Near-Zero Rate

James BullardA second Federal Reserve official  is on the record as doubting the wisdom of keeping the benchmark interest rate at near zero for an “extended” period of time, as the current policy outlook has stood for several months.
St. Louis Federal Reserve Bank President James Bullard told reporters yesterday at St. Cloud State University that he is concerned over the constant reference to a timeline on maintaining the key federal funds rate at 0-.25 percent.
“I’m mulling it over whether we should change that,” Bullard told reporters regarding the “extended period” position. “You wait and see how the economy evolves and take action depending on how the economy evolves. That could be any particular date. You don’t want to be locked in to a particular time frame.”
He said “dictating a particular time horizon is not what the committee wants to do. And that’s making me a little less patient with the extended period language.”
Bullard is one of 10 on the Federal Open Market Committee with the power to raise lending rates. But he stopped short of saying he would join Kansas City Fed Bank President Thomas Hoenig, the lone dissenting vote in the Jan. 26 FOMC meeting on keeping the federal funds rate at its historic low.
The current Fed policy is suitable for the mild state of economic recovery, although there is a risk of contributing to inflation down the line, Bullard said.
Hoenig on Tuesday indicated that he is likely to dissent again on holding policy steady at the next FOMC meeting on March 16.
At the January meeting, Hoenig voted against staying the course with the key funds rate because he believed it was no longer “advisable to indicate” that economic and financial conditions were likely to “warrant exceptionally low levels of the federal funds rate for an extended period,” according to the Fed’s wrap-up of the meeting.
“In recent months, economic and financial conditions improved steadily, and Mr. Hoenig was concerned that, under these improving conditions, maintaining short-term interest rates near zero for an extended period of time would lay the groundwork for future financial imbalances and risk an increase in inflation expectations,” the Fed reported.
Meanwhile, the Fed’s update this week on economic conditions derived from reports into its 12 districts showed that nine districts reported improved conditions, “but in most cases increases were modest.”
The Fed’s so-called Beige Book reported that severe snowstorms in February limited economic activities, particularly consumer spending which managed slight gains. Most districts indicated that banks remained cautious about lending.
“New York, St. Louis, and Kansas City reported somewhat tighter credit standards on commercial real estate loans, and New York noted tighter standards for commercial and industrial loans,” the report said. “In other Districts, credit standards were little changed but remained tight.”

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