* U.S. cannot ease debt burden by “surprise” inflation –
Bullard
* Says investors signal they think Fed may allow inflation
above 2 pct
* Inflation will impose costs on savers, higher interest
rates in future
By Alister Bull
MEMPHIS, Oct 4 (Reuters) – The United States faces a problem
of too much debt, but any suggestion that this burden can be
eased by allowing inflation to rise will just result in higher
borrowing costs in the future, a senior Federal Reserve official
said on Thursday.
James Bullard, president of the Federal Reserve Bank of St.
Louis, said that inflation was sometimes seen as a way to
“partially default” on existing debts, because it lowers the
amount the borrower repays in real, inflation-adjusted terms.
“A partial default today through higher inflation would be
paid for via higher inflation premiums in future borrowing.
Creditors would want to protect themselves against an
unpredictable central bank,” he told the Economic Club of
Memphis in prepared remarks. “Alas, in economics there is no
free lunch,” he said, quoting Nobel Prize-winning economist
Milton Friedman.
Bullard is not a voting member of the Fed’s policy-setting
committee this year, but will hold a rotating vote in 2013.
“Is this happening? Distant inflation expectations from the
TIPS (Treasury inflation protected securities) market seem to
suggest that investors do not completely trust the Fed to
deliver on its 2 percent inflation target,” he said.
The U.S. has been slowly recovering from the deep 2007-2009
recession, which was caused by a collapse of the housing market
that triggered a devastating global financial crisis.
Many U.S. households were left owing more on their homes
than the properties were worth. At the same time, the U.S.
government has aggressively expanded spending to shield the
country from an even deeper downturn, widening the deficit and
driving up national debt.
Bullard has publicly stated that he would not have voted for
the Fed’s third round of so-called quantitative easing announced
at its policy meeting last month, at which it also committed to
holding interest rates near zero until at least mid-2015.
The Fed also promised that it would keep rates ultra-low
even as the economy strengthens, in order to ensure that
stubbornly high U.S. unemployment was brought back to more
normal levels, so long as inflation remained under control.
Bullard said that any effort to inflate away the debt
problem would impose severe costs on the people who had lent the
money, or those who lived on fixed incomes.
“The partial default would occur against savers, mostly
older U.S. households, and against foreign creditors,” he said.
Fed critics say that its $2.3 trillion purchases of
Treasuries and mortgage-backed bonds, plus September’s decision
to buy another $40 billion of mortgage-backed securities every
month until hiring picks up, will severely sap the value of the
dollar.
