By Ann Saphir
MADISON, Wis., Jan. 10 (Reuters) - A top U.S. Federal Reserve official on Thursday predicted U.S. economic growth of 3.2 percent for this year and for 2014, crediting in part the central bank’s recent policy easing for what he called a “bullish” outlook.
St. Louis Fed President James Bullard, a voting member this year on the Fed’s monetary policy panel, said he also expects unemployment to drop over the next two years, while inflation should remain near the Fed’s 2 percent target rate.
“You should be standing and cheering, because this is fantastic news,” Bullard told the Wisconsin Bankers Association, to polite laughter.
Easier monetary policy in the last six months, and a reduction in economic headwinds and uncertainty, will help boost growth well above the 2.3 percent potential growth rate that is now the norm for the United States since the damage of the financial crisis. The U.S. economy, before the crisis, routinely grew at 3 percent or more, he said.
The Fed has been buying $85 billion in mortgage-backed securities and Treasuries each month under a quantitative easing program that it can adjust at any time. The purchases are meant to kick-start growth and ratchet down unemployment, which stood at 7.8 percent last month. The bond-buying program, known as QE3 because it is the Fed’s third round of quantitative easing, puts the central bank on track to buy $1 billion at an annualized pace.
“I‘m in the business and even I think that’s a big number,” he said.
Bullard, a centrist who argues that current monetary policy is more accommodative than most people appreciate, said that in the months ahead the Fed will make judgments on asset purchases based on economic data.
“Hopefully, we’ll be able to draw the program to a close at an appropriate time, given the behavior of the economy,” he said, adding the Fed could taper the program as needed. “If you are as optimistic as I am, you might envision an early end to the program,” he said; those with a more pessimistic view might see the buying continue into 2014.
The U.S. economy grew at a decent 2.7 percent annual rate in the third quarter but is expected to have slowed in the final months of the year. Fed officials see GDP growth of between 2.3 to 3.0 percent this year, and 3.0 to 3.5 percent in 2014.
Bullard said the Fed’s decision last month to tie its interest-rate policy to economic conditions rather than a future date means the Fed is no longer sending an “unwarranted pessimistic signal.”
But the Fed’s new promise to keep interest rates near zero until the unemployment rate falls to 6.5 percent, as long as inflation does not threaten to rise above 2.5 percent, poses several problems, he said, including the Fed’s inability to target medium or long-term unemployment.