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Economy Should Recover in Third Quarter: Fed's Bullard

St. Louis Fed President James Bullard told CNBC Monday that he is cautiously optimistic that there will be economic growth in the US during the second half of the year.

"We should see the turnaround in the third quarter," Bullard said. "When the economy is down it's vulnerable to further setbacks, but I do see growth in the second half of 2009."

Bullard also said that the banking system is still under stress but there are positive signs. "The measures of stress have come off their highs and we can take some encouragement from that," said Bullard.

(Watch Video for full interview)

Bullard also said that fear of deflation is abating and that the increase in long term yields was a combination of inflation fears and improvement in the economy. "We are avoiding a deflation outcome like Japan in the 90's," said Bullard. "There is some inflation risk but you have to avoid both."

Bullard also said the Federal Reserve was trying to develop guidelines for future policy moves and that the announcement effects of the Fed's security purchases was "substantial."

Bullard went on to say that the Fed's asset purchases should be guided by the course of the economy. "The Fed has always bought Treasurys," said Bullard. "I don't see it as radical policy as other people do."

Bullard did say that the Fed was thinking hard about an exit strategy by this summer in regards to the purchases.

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