Stein Says QE Taper Choice Should Depend on Economic Data
Federal Reserve Governor Jeremy Stein, who has backed record stimulus, said officials considering when to start reducing the pace of asset purchases should evaluate economic data since the program began last September, rather than looking only at the most recent figures.
The Federal Open Market Committee should “be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting -- as salient as these releases may appear to be to market participants,” Stein said today in New York.
“Economic fundamentals” have improved since the Fed’s third round of asset purchases began in September 2012, Stein said. The unemployment rate has fallen to 7.6 percent from 8.1 percent, and the average monthly pace of payroll gains has risen to 194,000 in the past six months, compared with 97,000 over the six months before the bond buying started.
Stocks fell after Stein’s speech, as traders focused on his reference to September, before trimming losses. The Standard & Poor’s 500 Index declined 0.4 percent to 1,606.25 at the close in trading in New York after falling as much as 0.8 percent. The yield on the 10-year Treasury note rose 0.02 percentage point to 2.49 percent.
“He’s not saying explicitly we’re going to taper,” said Andrew Wilkinson, chief economic strategist at Miller Tabak and Co. in New York. “If we get firm reports, and 175,000 jobs a month would be relatively firm, I don’t think it would do any harm to start in September. The process is dependent on the data rather than the calendar.”
Stocks and Treasuries have fallen since June 19, when Fed Chairman Ben S. Bernanke said the Fed could start reducing the $85 billion monthly pace of bond purchases later this year and end the purchases in the middle of 2014, assuming that the economy meets the Fed’s forecasts.
The Fed has said it will maintain asset purchases until the labor market has “improved substantially,” without defining that term. At the June 19 press conference, Bernanke said he expects the jobless rate to be about 7 percent when the Fed halts asset purchases.
Stein, in today’s remarks to the Council on Foreign Relations, said the 7 percent figure doesn’t represent a change in policy. Rather, it is “an effort to put more specificity around the heretofore less well-defined notion of ‘substantial progress.’”
Since Bernanke’s June 19 news conference, policy makers have emphasized that they intend to provide stimulus long after ending monthly bond purchases.
At the start of the current round of purchases in September 2012 -- with the most recent government report putting unemployment at 8.1 percent -- the Fed couldn’t be sure how far it would need to expand its balance sheet to reach its goals, Stein said.
“As we get closer to our goals, the balance sheet uncertainty becomes more manageable -- at the same time that the market’s demand for specificity goes up,” Stein said.
The Fed is seeking “a 7 percent unemployment rate associated with substantial improvement in the labor market,” he said. “If it’s 7 percent that gets there because of an aberrant move in the labor force participation rate, that’s not what we’re looking for.”
A report next week from the Labor Department may show that the unemployment rate fell to 7.5 percent this month from 7.6 percent in May, according to the median forecast in a Bloomberg survey of economists. Employers probably added 165,000 workers to payrolls, down from 175,000 the prior month.
Economic growth is on the verge of picking up as “a lot of the headwinds we saw before -- Europe and others -- have dissipated” and fiscal restraint recedes, Stein said.
William C. Dudley, president of the Federal Reserve Bank of New York, said yesterday any decision to reduce the pace of asset purchases wouldn’t represent a withdrawal of stimulus and an increase in the Fed’s benchmark interest rate is “very likely to be a long way off.” Bond purchases could be prolonged if economic performance fails to meet the Fed’s forecasts, he said.
Concerns the Fed may curtail accommodation helped push the yield on the 10-year Treasury note as high as 2.61 percent this week from as low as 1.63 percent in May. Fed Governor Jerome Powell and Atlanta Fed President Dennis Lockhart also sought yesterday to damp expectations that an increase in the benchmark interest rate will come sooner than previously forecast.
Even as the Fed aims to provide more clarity, “there are limits to how much even good communication can do to limit market volatility, especially at times like these,” Stein said.
“We have attempted in recent weeks to provide more clarity about the nature of our policy reaction function, but I view the fundamentals of our underlying policy stance as broadly unchanged,” he said.
As a Fed governor, Stein has a permanent vote on monetary policy decisions on the Federal Open Market Committee. While never dissenting from an FOMC decision, he has voiced concern that prolonged Fed stimulus may lead to financial instability and fuel asset price bubbles.
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