Although the U.S. target rate will be kept at zero for some time, St. Louis Fed President James Bullard said it must not be forgotten that the Federal Reserve still has substantial ammunition to boost the economy.
He said alternative policies are just as effective as fixing interest rates, and that the expansion of the Fed's balance sheet will go a long way to helping the U.S. economy.
The Fed recently embarked on an ambitious quantitative easing monetary policy, promising support for asset-backed securities related to mortgages, student loans, and credit card debt.
The main concern now is the "reversibility question" of these initiatives, he said, expressing concern that after 18 months of financial market turmoil, there appears to be no end in sight.
Bullard said the soaring commodity price shock in summer 2008 was in part to blame for the downward spiral that began in September, and said the consequent spread into the global economy is worrisome.
The United States remains in the middle of a sharp recession, he said, adding that he expects first quarter growth to be weak, and fourth quarter growth to be revised downwards.
Deflation is also a concern, he said, and if it occurs, the housing market crisis could be further exacerbated. On the other side of the coin, Bullard said inflation is possible even with a zero interest rate.
By Megan Ainscow and edited by Stephen Huebl
©CEP News Ltd. 2009