A strong global economic recovery is under way, and is unlikely to be thrown off course by European debt woes or the improbable event of the bursting of an asset bubble in China, a top Federal Reserve official said on Monday.
While the sovereign debt crisis in Europe is indeed a serious matter, the global recovery at this point looks very strong and seems unlikely to be derailed, said St. Louis Federal Reserve Bank President James Bullard in remarks prepared for delivery to a conference in Tokyo.
Bullard also said Europe's sovereign debt crisis had not pushed back the timing of an eventual rise in the Fed's benchmark interest rate, as some market watchers have speculated.
The recovery in the U.S. economy needs to become more firm in order for the Fed to raise rates, Bullard told reporters at a briefing in Tokyo.
Bullard, a voter on the Fed's interest-rate setting panel this year, said he expected the U.S. economy as measured by gross domestic product would recover to pre-global crisis levels by the third quarter of this year.
He also said U.S. inflation is contained now but could become a risk in the mid term due to the large U.S. budget deficit and the Fed's ultra-easy monetary policy.
Europe has not changed the idea of when we will move the federal funds rate, Bullard said.
The Fed is expected at a meeting next week to renew its pledge to hold rates exceptionally low for an extended period. Its target for the benchmark federal funds rate is zero to 0.25 percent.
The euro tumbled to a four-year low against the dollar a week ago and global stock markets sank on fears that Europe's sovereign debt crisis would jeopardize the banking system and dampen global growth.
But the financial turmoil in Europe is not large enough to spread to the United States and Asia, Bullard said. The United States may be a beneficiary of Europe, because their problems are causing a flight to quality that is lowering long-term Treasury yields, Bullard said.
This will have a more stimulative impact than the negative implications of dollar appreciation.
JOB CREATION WILL PICK UP
The U.S. recovery is likely to continue and private-sector job creation will start to pick up in the summer, gradually pushing the jobless rate lower this year, Bullard said.
Some economists may have an overly pessimistic view of the U.S. labor market as they are excluding the number of temporary jobs created, he said.
U.S. consumer prices unexpectedly fell in April for the first time in a year, with the core annual inflation rate recording its smallest gain since 1966, data showed last month.
Core consumer price data could be distorted by a weak housing market and if this factor is excluded the data would show prices of other goods are rising, Bullard said.
In late 2008 and early 2009 I was pretty concerned about deflation, Bullard later said after giving a speech.
But the United States has missed the main danger point of deflation. I am not as worried about deflation now.
Bullard was among three Fed officials who sought an increase in the Fed's discount rate in April. The discount rate, currently at 0.75 percent, is the rate the Fed charges commercial banks for loans.
But Bullard's latest comments did not appear to express impatience with the course of Fed policy.
The pressure on commercial banks' dollar funding due to turmoil in Europe means the Fed does not need to raise the discount rate for the time being, he said.
Now is not the time to normalize the discount rate, Bullard said.
If we did make any further moves in the discount rate, this would not be a signal of future monetary policy tightening.
Bullard has warned before that the Fed's pledge to maintain unusually low rates for an extended period could, if misread, perpetuate the boom-and-bust cycle that plunged the United States and the world into recession.
He has also has emerged as an advocate for quickly shrinking the Fed's extensive quantitative easing efforts by selling off some of the mortgage-related debt the central bank has bought to stabilize the financial system and pull the economy out of the worst financial crisis since the Great Depression.
The Fed is prepared to expand its quantitative easing if needed, but improvements in the U.S. economy suggest this won't be necessary, Bullard said.
The consensus view at the Fed, reflected by Fed Chairman Ben Bernanke, is that its bloated balance sheet will shrink naturally as the assets mature or are paid off.
(Editing by Michael Watson, Kim Coghill and Stephen Nisbet)