The U.S. output gap may be narrower than previously believed since today's measure of output considers activity levels established during the housing bubble, Federal Reserve Bank of St. Louis President James Bullard said.
When removing housing bubble data sets, it's likely the U.S. output gap — the difference between a nation's potential capacity for output minus what it actually produces — is smaller than analysts estimate, Bullard asserted during a speech to the 13th Annual InvestMidwest Venture Capital Forum.
"Most components of U.S. GDP — except for the components of investment related to real estate — have recovered to their levels in the fourth quarter of 2007," Bullard said.
The only way to recapture output levels established in the 2000s would be to re-inflate the housing bubble, a step the Federal Reserve doesn't want to take, he said.
"It is neither feasible nor desirable to attempt to re-inflate the U.S. housing bubble of the mid-2000s," Bullard said.
U.S. homeowners have about $9.9 trillion in mortgage debt outstanding against $712 billion of equity. Households would have to pay down this debt by about $3.7 trillion to return to a normal loan-to-value ratio of 58.4%, he said. Deleveraging will take a long time, he noted.
Bullard also supports easing long-term aggressive monetary policy.
"As the U.S. economy continues to rebound and repair, additional policy actions may create an overcommitment to ultra-easy monetary policy," Bullard asserted.
Additional stimulus as the economy recovers would create other negative results such as hurting savers by keeping interest rates low.
He advised curtailing excessive monetary policy and instead focusing on the unemployment issue by studying labor market policies that are contributing to elevated unemployment rather than toying with accommodative monetary solutions.
Since last summer, prospects for the U.S. economy have improved, he noted.