Fed's Bullard says that the Fed is ready to get monitary policy back to "normal"

St. Louis Fed President James Bullard says the Fed is "determined" to get monetary policy back to normal, and that policymakers could end QE2 a "little shy" of its full plan. 

Back to Normal would mean (in our interpretation)
  • Reduce Fed balance sheet by about 1 Trillion
  • Raise short term interest rates from zero to 2%
  • Eliminate risky mortgages and MBS
  • End Quantitative Easing as a policy and eliminate special
He also stated the obvious about Dodd-Frank that we argued many times that Dodd-Frank would codify TBTF.  The Federal Reserve was the biggest proponent of that legislation and now it is apparent that it did nothing but perpetuate TBTF.  The real way to end "Too Big to Fail" policy is by letting these banks go under.  Via WSJ:
In an interview on CNBC, Bullard said he sees the Fed as "possibly finishing the program a little bit shy of where we intended initially, and then go on pause for a while."

Asked about the impact of unrest in the Middle East and rising oil prices, Bullard suggested that the rise in oil hasn't lasted long enough to provide a shock to the economy, and should concerns about oil supplies from the region wane in the next few weeks, "this will go away."

"I think we're (Fed) determined to get policy back to normal in a way that does not disrupt the recovery."

Ending the bond purchase program, he later said, would show the market that the Fed is willing to unwind its balance sheet. Bullard said he would not be averse to such a move -- that he `likes subtle adjustments."

Asked to assess the scale of the municipal debt problem in the U.S., Bullard said it doesn't approach the problems of the European sovereign debt crisis, although some defaults are possible. He didn't elaborate. The European crisis, he said, still is a concern.

As for the economy in general, Bullard said the economy is in good shape for 2011, but that problems in the Mideast are a "wild card."

On other subjects, Bullard said changes in the regulation of the U.S. financial sector still have not ended too-big-to-fail, and that the "unpredictability" of the U.S. dollar makes it difficult to rely on for economic growth.

"We always watch the dollar, and a weaker dollar does tend to help us temporarily. But I think the dollar is so unpredictable that you can't really count on the movement."

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