Federal Reserve Bank of St. Louis President James Bullard said the central bank may need to increase monthly asset purchases above the current $85 billion pace if inflation slows further below its 2 percent goal.
The Federal Open Market Committee “will face a decision if inflation continues to decline,” Bullard said today in a telephone interview from Washington. “Then the committee will have to make a decision about how to provide more accommodation.”
Bullard, 52, dissented from the FOMC’s June 19 decision to maintain the pace of asset purchases, saying the panel should “signal more strongly its willingness to defend its inflation goal.” In a statement earlier today, he said the Fed “inappropriately timed” a plan to start trimming bond purchases later this year, saying it should have waited for signs the economy is strengthening and inflation is picking up.
The FOMC should have highlighted low inflation in its statement and indicated that “we can be more accommodative than we otherwise would have been,” he said in the interview.
Chairman Ben S. Bernanke, at a June 19 press conference following the statement, said the Fed may start “to moderate the monthly pace of purchases later this year” and end the program around mid-2014 if the economy performs as forecast. The bond buying will be cut by $20 billion at the Sept. 17-18 policy meeting, according to 44 percent of economists, a plurality, in a Bloomberg News survey released yesterday.
Prices as measured by the personal consumption expenditures index, a gauge watched by the Fed, rose 0.7 percent for the year ending April. Excluding food and energy, the index rose 1.1 percent, matching the lowest in the 53 years of record-keeping.
Ten-year U.S. Treasury yields rose above 2.5 percent for the first time since 2011 amid concern the Fed will cut bond purchases. The rate on the benchmark 10-year note jumped seven basis points to 2.48 percent at 1:30 p.m. in New York. The Standard & Poor’s 500 Index rose 0.2 percent, paring its three-day plunge to 3.7 percent.
While Bernanke called the decline in inflation “transitory,” Bullard said policy makers’ forecasts released this week show inflation won’t return to target until 2015 or later.
Commodities prices, which influence the cost of food and energy, have moved lower on reduced worldwide demand, Bullard said.
“The committee’s forecasts make it look like it is not” transitory, he said. “Europe is in recession -- one of the biggest economies in the world. China has been slower than expected.” Identifying what will cause prices to move higher as the FOMC expects is a “great question,” he said.
Announcing a plan to taper bond buying is at odds with slower growth and a decline in inflation, Bullard said. While U.S. growth may pick up from 1.5 percent to 2 percent this quarter, it would be prudent to wait and see if that occurs, he said.
One influence on the FOMC “that is really hurting” may have been the timing of quarterly press conferences, Bullard said. The committee may feel obligated to make major changes in policy only during meetings when there is a press conference rather than at any meeting, he said.
“I have urged the chairman to change that policy” and hold media briefings after each meeting, he said. “I think it is an important limit and it is a bureaucratically imposed limit.”
Rising U.S. Treasury yields partly reflect signs of stronger growth, as well as investors’ expectations of a sooner-than-expected pulling-back of bond buying, Bullard said. Rising inflation-adjusted interest rates represent a tightening of financial conditions that could slow economic growth, he said.
“I do think it is a risk,” Bullard said.
Bullard said the FOMC is too focused on unemployment, which is largely affected by elements outside of its control and has fallen faster than the Fed expected.
The St. Louis Fed president lowered his forecasts for this year’s pace of economic growth to 2.6 percent from 3 percent. He predicted the jobless rate would fall to 7.1 percent at the end of the year from 7.6 percent in May.
While Bernanke outlined a possible end to asset purchases in midyear 2014 when the jobless rate is projected to be about 7 percent, a faster decline in the rate could create uncertainty about Fed policy and is a “looming issue,” Bullard said.
“We should get back to focusing on what we can do in the medium term, which is keep inflation close to target, and put less weight on labor-market outcomes,” he said.
Bullard said the potential for asset price bubbles, which has been raised by Kansas City Fed Bank President Esther George among others, “is a concern” though “there just isn’t enough tangible evidence” for that to sway policy now.
The U.S. central bank began its third round of large-scale asset purchases in September by buying $40 billion a month of mortgage-backed securities. It added $45 billion of Treasury purchases in December. The FOMC has said since September that it will buy bonds until seeing signs of substantial labor-market improvement.
Since 2010, Bullard has expressed concern that slowing inflation could lead to deflation, or a broad decline in prices, and Japanese-style economic stagnation. He has also said the FOMC needs to safeguard the credibility of its inflation target, defending the goal when price gains are either too high or too low.
Bullard, who calls himself the “North Pole of inflation hawks,” has been viewed as a bellwether for investors because his views have sometimes foreshadowed policy changes. He published a paper in 2010 entitled “Seven Faces of the Peril,” which called on the central bank to avert deflation by purchasing Treasury notes.
The St. Louis Fed leader said the paper remains relevant today.
“We are at the juncture where further declines in inflation would start to really raise the possibility that we have some deflation,” he said.
At the time, he also called for the Fed to engage in open-ended bond purchases, without a set goal or ending date. That approach has been adopted in the latest round of purchases.
Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
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