Fed's Bullard Jolts Bonds and Dollar—But Not Stocks

Fed officials have been singing different tunes about monetary policy recently, but one voice has risen above the rest to boost the dollar and pressure Treasury bonds.

It may be that he has had the most appearances in the last several days, but the hawkish words of St. Louis Fed President James Bullard are being heeded more than usual by the foreign exchangeand Treasury markets.

On Tuesday, Bullard was even more strident in his comments against the Fed's quantitative easing program, saying the economy is strong enough for the Fed to stop $100 billion short of its planned $600 billion Treasury purchase program.

"We think that there are legitimate and justified concerns on the part of a number of FOMC (Federal Open Market Committee) members about the medium-term impact of the expanded balance sheet on inflation," said Robert Sinche, chief currency strategist at RBS. "I think any number of them are highlighting the risk of higher inflation and are doing it at a time when it looks like the trough in core inflation is behind us."

The stock market, a beneficiary of the Fed's quantitative easing program, has shrugged off the Fed speak and was sharply higher Tuesday. Stock traders are mostly dismissing Bullard because he currently is a not a voting member of the FOMC and often questions the Fed's easy money program.

"I did see Bullard's comments, and they're irrelevant. He has very little influence as a non-voter. The only person who can shift the mindset of QE magic is the chairman himself," said Todd Schoenberger at LandColt Trading, referring to Ben Bernanke.

Bullard, speaking in Prague, said deflation is less of a risk and the Fed needs to be careful about inflation.

"I think it's still reasonable to review QE2 in the coming meeting, especially this April meeting, and to see if we want to decide to finish the program or to stop a little bit short," Bullard said.

The Fed's next meeting is April 26 and 27, and Bernanke will hold the first of four newly announced annual media briefings following the meeting.

The St. Louis Fed president also said the Fed needs to start reducing the balance sheet and then hike rates. "We're still buying Treasurys. We're feeding the fire at this moment," he told reporters.

While this view is not new, Bullard's comments come when markets are becoming increasingly concerned about inflation and the approaching end of the Fed bond purchase program.

His view was countered by other Fed speakers, such as Chicago Fed President Charles Evans who said Monday that the purchase of $600 billion in securities is "just about the right number" and it would have to be a high hurdle of economic improvement for him to believe the Fed should end the program before June, as currently scheduled.