The president and CEO of the Federal Reserve Bank of St. Louis says the Fed will continue to keep interest rates low for an extended period of time.
James Bullard spoke at his alma mater St. Cloud State University on Friday. In his remarks, Bullard said the Fed needs to see more indications of economic strength before boosting rates.
"We've got, still, a shrinking jobs number, we've got very high unemployment, and we've got inflation, which is pretty low and pretty stable," Bullard said. "So I think we're going to have to see an improved an economy before we'll be turning to the issue of raising rates."
Bullard is not currently a member of the Fed's interest rate policy committee, the Federal Open Market Committee, but he will be on the panel starting next year.
In his remarks, Bullard reversed an earlier judgment from nearly a year ago saying this recession has been severe, and in some respects worse than the 1981-1982 recession. But he doesn't think this downturn's unemployment rate will peak as high as it did in 1982 at 10.8 percent.
Bullard said by the end of October, a survey of economic forecasters could show the recession has started to wind down with positive growth in the third and fourth quarters of this year and into 2010.
"When we look back at this episode, we'll say the recession ended in the summer of 2009," he said. "So that's encouraging; certainly better than getting more negative numbers."
Bullard said consumption numbers have recently turned around as well. "Yes, we had the Lehman and AIG episode about a year ago and that did cause problems for the economy, but consumption had fallen off quite a ways by that time," he said.
When the price of crude oil topped $100 a barrel around March 2008, Bullard said people became worried that something fundamental was going on in commodities and oil markets, so they began to change their spending behaviors and stopped buying cars in the first quarter of 2008.
The housing market has been the epicenter of downturn. Bullard says he thinks the housing market has hit bottom with house prices stabilizing slightly.
“I think we're going to have to see an improved an economy before we'll be turning to the issue of raising rates.”James Bullard, St. Louis Federal Reserve Chief
"I do think the housing market is ceasing to decline," he said. "It's come down from a very high level, it's come down to a low level, but it's flattening out in that area and I think that that's good news because that will cease to be a drag on the economy as the housing market turns around."
Labor markets still don't look good, according to Bullard. The unemployment rate has rocketed to almost 10 percent. Unemployment claims, which in normal times hang around 300,000 to 350,000, have peaked at 650,000 during this economic crisis.
"It has come down, but still really high levels--nowhere near this normal level, so we'd like to see these unemployment claims drift down a little faster," Bullard said . The latest number is 521,000.
"We want to see that come down and as that recedes, we'll see improvement in the labor market, but right now, it's pretty sluggish," he said.
Bullard said the Federal Open Market Committee has said it wants to keep inflation at 1.5 to 2 percent even though it doesn't have an official inflation target.
"So it doesn't really seem like we have inflation risk [for] about a year, maybe a little more than a year," he said. "If you look out further you might worry about medium term inflation risk because the Fed has been very aggressive in pumping a lot money into the economy."
On the other hand, Bullard said he's been worried about deflation for the economy, particularly a Japanese-style outcome, where prices spiral downward over a long period of time, following this financial crisis.
"I think that would be very troublesome for the U.S. economy," he said.
Bullard said the fall in house prices has already created a lot of problems for American households.