By Steven K. Beckner

Market News International - St. Louis Federal Reserve Bank President James Bullard said Thursday that the Fed needs to keep the federal funds rate near zero "for an extended period," but said it will need to start implementing an "exit strategy" next year.

He was not specific on timing.

Bullard, speaking to the College of Business at the University of Arkansas-Little Rock, anticipated possible sales of Fed assets as part of the exit strategy.

Echoing other Fed officials, he said "recent data suggest the economy is stabilizing, and there should be positive economic growth in the second half of 2009."

Bullard said the housing sector seems to be bottoming and pointed to a slower pace of job losses, but said consumer spending is apt to be slow to recover. He said financial conditions have improved, but are not yet back to pre-crisis levels.

He was also upbeat about external demand for U.S. goods and services. "The international outlook is also showing more positive signs, most recently with France, Germany and Japan reporting positive growth figures."

Bullard gave no indication that he thinks the Fed should tighten monetary policy in these early stages of econmic recovry, but suggested that it needs to do so next year as the economy gains strength.

"The Fed's main objective during 2007-2009 was to avoid a deflationary experience such as the one experienced during the 1990s in Japan," Bullard said. "Monetary policy is still very accommodative and the FOMC intends to keep the fed funds target near zero for an extended period."

However, he added, "As we head to 2010, the Fed will shift its focus to implementing an exit strategy in order to avoid any potential inflation threats to the economy."

He highlighted three parts to exiting from current monetary policy: Exiting the liquidity programs as they expire; exiting the asset purchase program, and exiting current interest rate policy.

"While exiting liquidity programs seems quite clear, exiting the asset purchase program may have to rely on selling assets as appropriate," Bullard said.

** Market News International **