Fed's Bullard: Lessons To Be Learned From Financial Crisis

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St. Louis Fed President James Bullard said Friday that policy makers could learn three lessons from last year's financial crisis that would help shape monetary policy and help to mitigate potential future crises.

Speaking in a panel discussion at the Philadelphia Federal Reserve's annual policy forum, Bullard said that the first lesson is that the Fed's function as a lender of last resort is more flexible and powerful than previously imagined.

Bullard warned that the intervention of the central bank in the wake of the 2008 financial collapse may set up expectations that the Fed may intervene again in future financial crises.

"The lesson is that these programs were far larger and more varied than what could have been anticipated before the crisis," he said in prepared remarks. "The effectiveness of these programs should now be carefully evaluated, and the central banking research community needs to think much more carefully about the ramifications of the lender-of-last-resort policy."

The St. Louis Chief said the crisis also revealed that quantitative easing could be effective in helping recovery after interest rates have already been lowered to zero-level.

Bullard highlighted the success of the asset purchase program in easing monetary conditions during the crisis once the Fed had lowered interest rates to near-zero levels.

He added, however that quantitative policy should be conducted in line with interest rate policy.

If reasonably encouraging information on the economy emerges, the FOMC could consider removing some monetary accommodation through asset sales," he said. "If the economy performs poorly, then the FOMC could consider additional asset purchases."

Bullard also commented on asset price bubbles, saying that the financial crisis showed that such bubbles were "a very serious issue" for monetary policy, and said that he expected debate on the issue to intensify.

He addressed the tech bubble in the 1990s and the housing bubble in the 2000s, emphasizing that unemployment and inflation remained low during those periods.

"If the policy was too low for too long in the 1990s and the 2000s, why didn't we see more inflation?" Bullard said. "Yet, without an increase in inflation, asset price misalignments seem to have caused significant problems for the macroeconomy."

He added, "This may mean that monetary policy should put more weight on asset prices going forward. We need better analysis of policy issues with respect to bubbles."

St. Louis Fed President James Bullard said Friday that policy makers could learn three lessons from last year's financial crisis that would help shape monetary policy and help to mitigate potential future crises. (Market News Provided by RTTNews)