Fed’s Bullard Opposes Tapering of QE Amid Slowing Inflation
Federal Reserve Bank of St. Louis President James Bullard, who dissented for the first time last month over the issue of defending the Fed’s price goal, said the central bank shouldn’t trim its monthly bond purchases until inflation accelerates toward its 2 percent target.
“Pulling back on accommodation as inflation is sinking is not the right combination,” Bullard, who votes on monetary policy this year, said today in a Bloomberg Television interview with Michael McKee to air July 15. “I’d like to see us do more” to ensure inflation doesn’t continue to slow.
Bullard last month dissented against a pledge by the Federal Open Market Committee to maintain its $85 billion in monthly bond buying, saying the panel should “signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.”
Inflation as measured by the personal consumption expenditures price index rose 1 percent for the year ending May, below the central bank’s 2 percent goal.
Price gains have been “very low,” Bullard said today. “I’d at least like to see inflation tick up a little or get some kind of reassurance” that it “will come back toward our target.”
If inflation were to fall further, “the committee would have to rethink its strategy,” Bullard told reporters in a later briefing. “The simplest thing” would be for the FOMC to say “we’ll stick to the QE program” longer than investors expect, he said, referring to quantitative easing.
If inflation “stagnated at 1 percent” for six months, that would be “a bit of a concern” as well, he said.
San Francisco Fed President John Williams told reporters in Vancouver that low inflation had prompted him to consider the need for additional accommodation. He had said as recently as June 3 that the central bank could start trimming its purchases as early as “this summer,” yet more recently said he supported Fed Chairman Ben S. Bernanke’s plan to begin tapering later this year.
“We’re probably going to need to have more accommodation than I had been thinking a couple months ago because of the inflation data,” Williams said after a speech today, adding that he still expects inflation to speed up in the next several quarters.
Williams has never dissented from an FOMC decision. He does not vote on policy this year.
Bernanke said on June 19 that the FOMC may taper bond purchases later this year and end the program around mid-2014 as long as the economy performs in line with the Fed’s forecasts. About half the 19 participants on the FOMC favor ending the program by year’s end, according to meeting minutes released this week.
Philadelphia Fed President Charles Plosser, who has opposed the Fed’s current round of asset purchases, said today the central bank should begin trimming monthly bond buying in September and end the unorthodox stimulus by year-end.
“I don’t want to do it all at once, but I think we should begin to taper very soon and hopefully end it by the end of this year,” Plosser said today in a separate Bloomberg Television interview to air on July 15. “That would be a healthy thing for the economy. We can do it gradually,” Plosser said.
Plosser, who doesn’t vote on monetary policy this year, has repeatedly spoken out against additional easing by the Fed.
In a speech to the Global Interdependence Center in Jackson Hole, Wyoming, Bullard said a recent surge in U.S. Treasury yields may stem from “increased optimism” about the economic outlook, adding that forecasts for growth have proven too optimistic during the past several years.
Positive indicators include improving real-estate markets, rallying equity markets, a “subdued” European sovereign debt crisis, less U.S. “fiscal brinksmanship” and households improving their financial balance sheets, Bullard said in remarks prepared for the speech.
“However, given recent forecasting performance, we should be careful in using an optimistic forecast to justify current policy decisions,” he said. “A more prudent approach would be to wait to see if better macroeconomic outcomes materialize in the months and quarters ahead.”
In response to audience questions, Bullard said asset price bubbles such as the mid-2000s housing bubble have become “absolutely a front and center issue.”
In his interview, Bullard said during the June FOMC meeting “there was a little bit of slippage back to date-based guidance,” referring to setting a tentative end date for the bond buying.
“To have it creep back in was something I found a little disturbing,” though Bernanke “did mitigate that” to “some extent” by highlighting that the schedule was contingent on economic reports, he said.
Bernanke said this week he favored maintaining stimulus “for the foreseeable future,” even as the FOMC has been split on how quickly it should reduce bond buying, or quantitative easing. He referred to “my good friend Jim Bullard” as he agreed the central bank should defend the inflation target when price gains slow too quickly.
U.S. stocks rose a seventh day, sending the Standard & Poor’s 500 Index to a record close after JPMorgan Chase & Co. and Wells Fargo & Co. reported earnings that exceeded analysts’ estimates. The S&P 500 increased 0.3 percent to 1,680.19 in New York. The U.S. 10-year Treasury note yield rose to 2.58 percent from 2.57 percent.
“There’s a little bit of a mixed bag” on a broad set of labor market indicators, but the main employment indicators including payroll growth have improved since September 2012, Bullard said. The U.S. central bank began its third round of large-scale asset purchases in September.
The St. Louis Fed president has been an outspoken supporter of open-ended bond buying, with no limit on the size or duration of the buying. Fed officials should vary the amount of bond purchases in response to fresh economic data, Bullard has said.
Since 2010, Bullard has expressed concern that slowing inflation could lead to deflation, or a sustained 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, 52, 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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