Federal Reserve Bank of St. Louis President James Bullard, who has backed continued bond purchases by the Fed, said policy makers should be careful in changing course based solely on their economic forecasts, which have proven in the past to be too rosy.
Federal Open Market Committee forecasts “have tended to be too optimistic over the last several years,” Bullard, who votes on monetary policy this year, said today in the text of prepared slides for a speech in Paducah, Kentucky. “Given this experience, I think caution is warranted in taking policy action based on forecasts alone.”
Fed officials are debating when to begin scaling back a third round of asset purchases as the U.S. labor market heals and inflation remains below their 2 percent goal. Chairman Ben S. Bernanke next month will probably begin to reduce the central bank’s $85 billion in monthly bond purchases, according to 65 percent of economists surveyed by Bloomberg.
“The resolution of the tapering debate will depend on additional macroeconomic data from the second half of 2013,” Bullard said in remarks similar to an Aug. 2 speech in Boston. “It is especially important to see if better macroeconomic growth materializes in the months and quarters ahead, and whether inflation naturally returns toward target.”
Bullard told reporters after his speech he hadn’t decided whether he would favor slowing bond buying in September.
“I have not made up my mind,” he said, adding it’s unclear what options will be presented or what Bernanke will recommend. “I wouldn’t want to prejudge the meeting.”
Bullard said while he sees “clear improvement” in job markets, other factors might make him hesitate to slow purchases.
“I would be happy to claim there has been substantial improvement in labor markets,” he told reporters. “The bigger question marks are on growth and inflation.”
The FOMC’s first tapering may be small, with monthly purchases reduced by $10 billion to a $75 billion pace, according to the median estimate in a survey of 48 economists conducted Aug. 9-13. The Fed will end the buying by mid-2014, they said. In a survey last month, half of economists predicted a reduction in bond buying at the next scheduled FOMC meeting Sept. 17-18.
Bullard backed an FOMC decision in July to keep buying $85 billion in bonds each month after saying in a June 19 dissent that the committee needed to defend against inflation running too far below its 2 percent target. The FOMC echoed Bullard’s concern in its July 31 statement, saying “persistently” low price gains “pose risks” to the economy.
The St. Louis Fed chief has been a leading voice for open-ended quantitative easing, with no set end date and the size of purchases varying in response to changes in economic data.
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