Bullard Says Fed Tightening Likely to First Allow Balance Sheet to Decline
St Louis Federal Reserve Bank President James Bullard
Scott Eells/Bloomberg
James Bullard, president and chief executive officer of the Federal Reserve Bank of St. Louis, speaks during an interview in New York.
James Bullard, president and chief executive officer of the Federal Reserve Bank of St. Louis, speaks during an interview in New York. Photographer: Scott Eells/Bloomberg
May 18 (Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard discusses Fed policy and the outlook for inflation. Bullard speaks with Betty Liu and Michael McKee on Bloomberg Television's "In the Loop." (Source: Bloomberg)
May 18 (Bloomberg) -- John Ryding, chief economist at RDQ Economics LLC, talks about Federal Reserve monetary policy and the prospects for exiting quantitative easing. Ryding speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)
Federal Reserve Bank of St. Louis President James Bullard said the central bank may tighten policy this year by allowing its balance sheet to decline even with inflation showing signs of slowing in recent weeks.
“I still think it is reasonable” to expect tightening by year end, Bullard said today in a Bloomberg Television interview in New York. “I like a balance-sheet-first policy and I think the Fed will take a balance-sheet-first policy,” he said, referring to the central bank’s option of allowing its total assets to shrink as its bonds mature.
Fed officials are discussing how quickly to begin withdrawing record stimulus after completing the purchase of $600 billion in U.S. Treasuries by the end of June. Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said this month he favors raising the target interest rate this year, while Philadelphia’s Charles Plosser urged a pull-back in the “not-too-distant future.” New York Fed President William C. Dudley said the recovery hasn’t met the central bank’s goals.
“Some of the inflation numbers have been higher and it does concern me,” Bullard said. “I do think expected inflation has drifted back down on the TIPS market,” a reference to investor expectations measured through prices of Treasury Inflation Protected Securities.
“If the economy improves in the second half of the year, then we have to keep an eye on that and watch it closely, and expected inflation would bounce back up,” he said.
The yield on the Treasury 10-year note this week fell to 3.09 percent, the lowest level this year.
‘Lot of Inflation’
“It seems like you could get a lot of inflation out of” the balance sheet “if you don’t handle it correctly,” Bullard said in reference to the Fed’s record amount of assets.
Bullard’s concern about inflation represents a turnabout from last year, when he urged purchases of U.S. Treasuries to avert a broad-based decline in prices. He was the first Fed official to support a second round of bond purchases. Policy makers approved the so-called quantitative easing in November.
Bullard, 50, said the Fed is likely to go to a position of “hold” in June, then take time to assess the economy.
“The end of QE2 is high tide of easy monetary policy,” he said, referring to the second round of bond purchases known as quantitative easing. “It is very natural for the committee to go on hold” and then decide what to do.
Fed Chairman Ben S. Bernanke and his policy-making colleagues last month cut their forecasts for growth this year after the economy slowed in the first quarter. They increased estimates for inflation excluding food and energy prices.
‘Very Strong’
If the first quarter growth had been “very strong, then I think you would be in more of a hurry” to tighten policy, Bullard said.
The Fed is expected to raise its target fed funds rate by a quarter point in the first quarter of 2012, according to the median of 68 economists surveyed by Bloomberg News this month. The rate has been near zero since December 2008, and since March 2009 the Fed has pledged to keep it “exceptionally low” for an “extended period.”
Bullard said he expects 3 percent to 4 percent growth the remainder of the year.
“I am pretty optimistic the hiring will continue throughout this year” as “you have got a lot of lean firms that have cut what they could cut” during the recession, he said.
Private Sector
The Labor Department said May 6 the economy added 244,000 jobs in April with non-government employers adding 268,000 jobs, the best month for the private sector of the economy since 2006. Other job market data remain weak, as the unemployment rate has been stuck near 9 percent or higher for 25 months.
The consumer-price index increased 3.2 percent in the 12 months ended in April, the biggest year-over-year gain since October 2008, figures from the Labor Department showed this month. The index excluding food and energy rose 1.3 percent from April 2010, the most since February 2010.
Bernanke said last month he expects inflation resulting from higher commodities prices to be “transitory.”
The economy grew at a 1.8 percent pace in the first quarter of 2011, according to Commerce Department data.
Growth will pick up to 3.3 percent in the current quarter and 2.7 percent for the year, according to the median of 67 economists surveyed this month by Bloomberg News.
Bullard has rotated this year into an annual non-voting position. He joined the St. Louis Fed’s research department in 1990 and became president of the bank in 2008.
To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net.
To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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