Fed’s Bullard says QE3 would have ‘high hurdle’

St. Louis Federal Reserve St. Louis Federal Reserve

June 22 (Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard said today a possible third round of quantitative easing would face a “pretty high hurdle.”

“We can do that and I think it would be effective,” Bullard said in a television interview on Bloomberg Surveillance with Tom Keene. “But we’d be taking a lot more risk on our balance sheet. We’d be going further into uncharted territory.”

The Fed has already bought $2.3 trillion of securities in two quantitative-easing programs. Chairman Ben S. Bernanke this week signaled the Federal Reserve will probably add to its record stimulus should the economy fail to make sufficient progress in creating jobs for 12.7 million unemployed Americans.

The policy-setting Federal Open Market Committee on June 20 extended its Operation Twist program and said it will swap $267 billion in short-term securities with longer-term debt through the end of 2012.

“It’s a continuation of the existing policy,” said Bullard, who doesn’t vote on the Fed’s monetary policy this year. “The committee felt that it was maybe a bit imprudent to end the twist program right at this particular juncture. The committee has kind of been haunted by having end dates on programs and it seems like the end dates never occur at the right moment.” Operation Twist was to have ended this month.

Low Levels

Bullard said that “Treasury yields have gone to extraordinarily low levels. That took some of the pressure off the FOMC since a lot of our policy actions would be trying to get exactly that result.”

U.S. stocks rose after yesterday’s selloff, as the downgrade of global banks by Moody’s Investors Service was followed by rallies in financial shares. The Standard & Poor’s 500 Index added 0.5 percent to 1,331.83 at 9:31 a.m. New York time.

Borrowing costs have fallen since the Fed announced Operation Twist last year. The yield on the 10-year Treasury note fell to a record low 1.4387 on June 1. The yield has since risen to 1.66 percent.

Bullard said today that he expects “modest improvement in the labor markets as we go through the end of the year here.”

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