June 26, 2010 / 7:12 AM / 9 years ago

INTERVIEW - Fed's Bullard-Europe, weaker data weigh

WASHINGTON (Reuters) - The U.S. Federal Reserve will assess over the summer whether European government debt worries or faltering jobs or housing markets pose significant risks to the economic recovery, a top official said.

St. Louis Federal Reserve Bank President James Bullard is seen in this undated handout photograph. REUTERS/St. Louis Federal Reserve Bank/Handout

The European crisis “is on everybody’s mind” at the Fed, St. Louis Federal Reserve Bank President James Bullard told Reuters in an interview.

Evidence the U.S. recovery from a deep recession may be stumbling is far from conclusive but bears close watching, he added, in remarks reflecting a more cautious tone than in recent speeches.

“We just started getting our job growth going three months ago, and then all of sudden we get a kind of a weaker number,” said Bullard, who is a voter this year on the Fed’s policy-setting panel. Nonfarm payrolls added a disappointing 41,000 private sector jobs in May, denting hopes for a speedy recovery.

“So we do kind of want to see through the summer how that plays out and then assess at that point how we’re doing, is it a weaker recovery than we thought, is it a stronger recovery than we thought,” he said.

The Fed’s policy-setting Federal Open Market Committee itself struck a more tentative note on the recovery on Wednesday, nodding to turmoil in Europe in a post-meeting statement. Financial conditions had become less supportive of growth on balance as result of conditions abroad, the U.S. central bank said.

WAIT AND SEE

A major escalation of euro zone sovereign debt problems would be significant concern, Bullard said, adding that he sees the possibility of that as small.

However, rattled confidence in the euro has actually benefited the United States in the form of lower long-term interest rates as nervous investors rush to the shelter of the dollar. If the impact of the crisis is confined to Europe, the U.S. recovery could get a boost, Bullard said.

“The prudent thing at this point is ... we want to see what the impact of this is on the U.S. and see through the summer how this is going to play out,” he said.

“The data’s been a little weaker, so let’s wait and see. At this point, we’re not in any hurry. Inflation readings have been low anyway,” he added.

The Fed at its most recent meeting renewed its promise to hold interest rates exceptionally low for an extended period. It chopped rates to near zero in December 2008 and has flooded the economy with credit to provide an additional boost to economic growth.

Setting aside worries raised by softer economic indicators and Europe, the Fed continues to envision a moderate recovery, Bullard said.

“We would expect ... at some point start to gradually withdraw the accommodation and then things would continue to recover, and then eventually we would get back to normal,” he said.

However, if the economy takes a decisive turn for the worse, the Fed would have to consider further stimulus, probably buying more Treasury securities to ease financial conditions, Bullard said.

“If things got really bad in some dimension and we were back in crisis mode, I think the FOMC wouldn’t hesitate to do more if we had to, but I don’t really think that that’s the situation we’re in right now,” he said.

DISCOUNT RATE MOVE UNLIKELY

Bullard said another anticipated Fed move — raising the discount rate — is unlikely to happen in the near future. The discount rate is the interest rate the Fed charges banks for emergency loans, and is distinct from the rate the Fed targets to accelerate or decelerate the pace of economic growth, the interbank lending rate, or fed fund rate.

As the financial storm gathered in 2007 banks found it difficult to obtain funding in private markets, and the Fed cut the discount rate to make sure they could get short-term funds.

The Fed in February raised the discount rate to 0.75 percent from 0.50 percent, citing normalization in financial markets, but stressing the move was not the beginning of a tightening of financial conditions due to the recovery.

Bullard was one of three regional Fed bank presidents who has sought to increase the discount rate further. However, he said that with renewed market turbulence, such a move is not likely.

“Our window is kind of closed on that. I wish we would have done that earlier, but we didn’t,” he said.

Reporting by Mark Felsenthal; Editing by Diane Craft

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