Bullard Says Fed May Keep Rates, Balance-Sheet Steady to Assess Economy
Federal Reserve Bank of St. Louis President James Bullard said the central bank may keep its policy rate, the size of its balance sheet and policy language the same after completing asset purchases in June to provide more time to assess inflation and the U.S. economic outlook.
“Past behavior of the FOMC indicates that the Committee sometimes puts policy on hold,” Bullard said today in a speech in Farmington, Missouri. A pause “gives the Committee more time to assess economic conditions.”
Fed officials are discussing how quickly to begin tightening policy after completing the purchase of $600 billion in U.S. Treasuries by the end of June. They are also considering a strategy for how to remove stimulus, with a majority favoring ending the policy of reinvesting proceeds from maturing securities first before raising interest rates or selling assets, minutes of their April 26-27 meeting showed last week.
Bullard told reporters after the speech that the central bank may withdraw liquidity in response to stronger economic data later this year by allowing its balance sheet to shrink.
“If the economy comes in reasonably strong in the second half of the year, which I think it will, the likely next move would be to tighten policy,” he said. “The most likely way to do that would be to allow some runoff of the balance sheet.”
First-quarter growth had been a disappointment, but the slow pace wasn’t likely to last, Bullard said during his speech.
‘Reasonably Robust’
“I think the economy will be reasonably robust in the second quarter and the second half of the year,” he said.
The St. Louis Fed official told reporters that increased private-sector job growth was likely to continue because companies had become lean during the recession and would need to hire to meet growing demand. In addition, manufacturing has been “fairly good” and household spending has “held up well.”
At the same time, Bullard said the European debt crisis poses a risk to the expansion and warrants careful attention. The 10-year U.S. Treasury bond yield has fallen near a low for 2011 because of investor concerns about Europe.
Global demand may push the cost of energy out of line with other prices in the U.S., making a policy focus that excludes food and energy unreliable, Bullard said at a lecture hosted by the Mineral Area College Foundation.
Understate Inflation
“It is at least a reasonable hypothesis that global demand for energy will outstrip increased supply over the coming decades,” he said. “If that scenario unfolds, then ignoring energy prices in a price index may systematically understate inflation for many years.”
Bullard, repeating a theme from a speech last week, urged that the Fed drop its focus on core inflation, which excludes volatile energy and food prices.
“The ‘core’ concept has little theoretical or statistical backing” and is very arbitrary, he said. “Headline inflation is the ultimate objective of monetary policy with respect to prices,” Bullard said.
He also reiterated his support for a formal inflation target to help anchor households’ expectations on prices.
Bullard’s concern this year over inflation represents a change from last July, when he urged purchases of Treasuries to head off the risk of deflation. He was the first Fed official to support a second round of so-called quantitative easing. Policy makers in November approved the asset purchase plan.
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.
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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