Fed’s Bullard: European Crisis Unlikely To Cause Worldwide Shock

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(RTTNews) – St. Louis Federal Reserve President James Bullard said Thursday that Europe’s soverign debt crisis is unlikely to cause another worldwide economic recession.

Speaking at the Swedbank Economic Outlook Conference in Stockholm, Bullard said that economic recoveries in the U.S. and Asia are likely to keep the crisis contained and added that the global economic recovery is on track.

“Many countries have restructured or even defaulted over the years,” Bullard said. “In most cases, or nearly all cases, that has not resulted in any kind if global implications. There is no particular reason why a sovereign debt crisis has to mean anything for the global economy.”

Echoing remarks he made earlier in the week in London, Bullard said that governments’ unwillingness to allow major financial institutions to completely fail will actually diminish the effects of contagion.

“Governments have made it very clear over the course of the last two years that they will not allow major financial institutions to fail outright at this juncture,” he said. “Because these too-big-to-fail guarantees are in place, the contagion effects are much less likely to occur.”

Bullard also echoed his sentiment that the world is moving into a more volatile macroeconomic era, mainly due to limits and challenges in establishing credibility for a new, successful rules-based economic policy in the coming years.

“We know that credibility is often established only over a long period of time,” he said. “One key problem going forward will be how to re-establish credibility for macroeconomic policy. Credible policies are more effective, but may not be possible in the near term. Medium-term policy choices will have to take this into account.”

Bullard added that some key issues, such as how to address non-bank firms, may not be covered by reform legislation.

“There are clear limits to what U.S. regulatory reform is likely to accomplish,” he said. “Important problems will remain unresolved by the legislation.”

Bullard also touched on the Federal Reserve’s near-zero interest rate, saying that that removing the Federal Reserve’s near-zero interest rate policy without an inflationary impact will depend on perceptions of how and when it will be removed.

The St. Louis Chief – a member of the Fed’s policy-making committee – said that the Fed’s accommodative policy has been supplemented with “an aggressive quantitative easing policy that has generally been regarded as effective.”

“In theory, any credible commitment to remove the policy in finite time will work well,” he said. “In practice, markets may well lose faith sooner than that.”

Bullard also warned that a near-zero interest rate carries the risk that bubbles may be created by the low rates.

“Markets may confuse the policy with the ‘interest rate peg’ policy, in which rates do not adjust in response to shocks. In particular, multiple equilibria or ‘bubbles’ are possible.”

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