Fed Isn't Letting Congress Be 'Irresponsible': Bullard

A topFederal Reserveofficial denied Thursday that the central bank's monetary policy is allowing Congress to be irresponsible with borrowing and spending.

James Bullard
James Bullard

“We’re going to pursue monetary policy that’s the right one for the nation but not one that is trying to enable irresponsible fiscal policy,” St. Louis Fed President James Bullard told CNBC’s "Closing Bell." To do otherwise, would “end in tears for everyone,” he cautioned.

Bullard was responding to comments that economist Lawrence Lindsey made on CNBC Wednesday that the Fed was basically funding the U.S. deficit with its latest round monetary stimulus. (Read More:Fed Virtually Funding the Entire US Deficit: Lindsey.)

While Bullard is not opposed to additional monetary stimulus, he said it would have been better to wait before embarking on the third round of quantitative easing.

“I didn’t think the committee had a good case for taking action at this juncture,” Bullard said. “I would have kept it in our pocket and really see if the global slowdown is going to impinge on the U.S. economy and what the next steps in Europe are going to be.”

Global growth has been weaker than many economists were expecting at the start of the year and that’s concerning, Bullard noted. Europe is in recession and Asia is slowing down.

There are two potential outcomes for the U.S. in this scenario, the St. Louis Fed president said. Either the U.S. is a winner where we get the flight to safety and lower interest rates, or global growth drags down the U.S. economy, potentially into recession. (Read More:Why the State of the US Economy Defies Description.)

The country’s fiscal problems could also cause some economic weakness, but Bullard is confident politicians will reach a deal eventually. “What’s bad for the U.S. economy is that the political system requires brinksmanship to solve these kinds of problems,” he said.

He also said central bankers need to be vigilant about inflation. “The big concern for anyone involved in monetary policy is you might face a situation where inflation expectations get out of control and rates start to go up quickly and you do get into a crisis situation,” he said. (Read More:Tying Fed Policy to Jobs 'Risky and Dangerous': Plosser.)

Bullard noted that we’ve seen this phenomenon recently in both Italy and Spain. “We should not be complacent about this possibility,” he warned.