Fed's Bullard: QE3 possible if inflation eases

The US Federal Reserve could embark on a third round of quantitative easing depending on upcoming economic data, St Louis Fed president James Bullard says.

In an interview published in the Asahi newspaper today, Mr Bullard said he would want to confirm that inflation has eased before launching a third round of quantitative easing.

The US economy is likely to grow 2.5 per cent in the second half of the year, the Asahi also quoted Mr Bullard as saying.

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Expectations are growing that the central bank could ease policy at its two-day meeting starting September 20 after minutes from last month's gathering showed some policymakers pressed for bold and unconventional steps to shore up a flagging economy.

"Depending on future economic data QE3 is one choice, but we need to gather information about how the economy will perform in the second half of the year," Mr Bullard said in the Asahi, referring to the Fed's quantitative easing programme where it buys government debt.

"Before any moves, I would like to confirm that inflation is easing."

The head of the St Louis branch does not have a vote on the policy-setting Federal Open Market Committee this year.

Mr Bullard reiterated his view that if the Fed were to buy additional government debt it should do so incrementally, on a meeting-by-meeting basis. Bullard is known for his hawkish views on monetary policy.

The US economy is likely to grow 2.5 percent in the second half of the year, the Asahi also quoted Bullard as saying.

The Fed has completed a $US600 billion quantitative easing bond-buying programme, known as QE2. In addition, US interest rates are already near zero and the Fed has signalled it is willing to hold borrowing costs at that level for two years if necessary.

The minutes from the Fed’s August meeting revealed that the FOMC's pledge to keep US rates low until mid-2013 drew an unprecedented three dissenters.  In contrast, a "few" members thought that an even "more substantial move" was justified at this meeting.

What is clear is from these minutes is that the range of tools now available to the Fed is becoming increasingly limited, with some members increasingly concerned that the costs, for example in terms of inflationary consequences, may ultimately outweigh the benefits, ANZ said in a report this morning.

‘‘But with FOMC members apparently split on whether the US economy even warrants further monetary policy accommodation, the hurdle for another round of QE is high’’, the bank said.

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