Kansas City Federal Reserve Bank President Esther George, who has consistently dissented against additional stimulus, called for tapering the Fed’s $85 billion in monthly bond buying at its Sept. 17-18 meeting while cautioning that such reductions may prompt market volatility.
“An appropriate next step toward normalizing monetary policy could be to reduce the pace of purchases from $85 billion to something around $70 billion per month,” George said today in a speech in Omaha, Nebraska. Such a move would be “appropriate” at the next meeting, and future purchases could be “split evenly between” Treasuries and mortgage-backed securities.
George voted this year against all five decisions by the Federal Open Market Committee to press on with bond buying, saying the program risks creating imbalances in the economy and financial markets and pushing up long-term inflation expectations. Fed officials, who next meet Sept. 17-18, are debating when to start scaling back purchases they have pledged to continue until the job market shows signs of substantial improvement.
The FOMC’s “most hawkish member, who’s dissented at every meeting in 2013, has outlined a path that’s very much in line with the market forecast,” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York, referring to George’s tapering comments.
U.S. payrolls rose less than projected in August after gains the prior two months were revised down, and the unemployment rate unexpectedly fell to 7.3 percent from 7.4 percent as more people left the labor force, a Labor Department report showed today.
“Over the past 12 months, the unemployment rate has dropped a bit more than one-half of a percentage point, and the economy has added more than 2 million jobs,” said George. “At this pace of improvement, the labor market is creating enough jobs to continue bringing down the unemployment rate.”
The gain of 169,000 workers last month followed a revised 104,000 rise in July that was smaller than initially estimated, according to Labor Department figures. The median forecast of 96 economists surveyed by Bloomberg called for an August increase of 180,000.
The unemployment report hasn’t derailed economists’ expectations that the Fed this month will taper its bond buying by $10 billion.
Chairman Ben S. Bernanke and his colleagues will reduce Treasury purchases to $35 billion from $45 billion while maintaining mortgage-bond buying at $40 billion, according to the median of 34 responses today in a Bloomberg News survey of economists. That pace was unchanged from an Aug. 9-13 poll, as was a projection that the program will end in June.
George said in response to audience questions that some labor market trends, including the participation rate, stem from demographic changes that “monetary policy cannot directly affect,” and reversing them could be “problematic.”
The benchmark U.S. Treasury 10-year yield fell after release of today’s employment report, declining 0.06 percentage point to 2.93 percent in New York, Bloomberg Bond Trader data showed. Before the report, the yield breached 3 percent for the first time in two years.
Bernanke said in a June 19 press conference that the Fed may reduce the pace of purchases “later this year” and end them entirely by mid-2014. San Francisco Fed President John Williams, who doesn’t vote on policy this year, said Sept. 4 that he viewed “Bernanke’s timetable to still be the best course forward.”
Chicago Fed President Charles Evans, a voter on policy this year who has consistently supported record stimulus, said today the Fed shouldn’t begin to taper until inflation and economic growth pick up.
“To start the wind-down, it will be best to have confidence that the incoming data show that economic growth gained traction during the third quarter of this year and that the transitory factors that we think have held down inflation really do turn out to be transitory,” Evans said in a speech in Greenville, South Carolina.
Minneapolis Fed President Narayana Kocherlakota, who has backed bond purchases, said yesterday the central bank’s outlook for inflation and unemployment calls for more accommodation. He doesn’t vote on policy this year.
George said she favors a gradual unwinding of the bond purchases.
“As long as labor markets continue to heal and inflation remains stable near its target, I would like to see the pace of purchases gradually decline and brought to a close in the first half of next year,” she said.
In addition to buying $40 billion a month in mortgage debt and $45 billion a month in Treasuries, the Fed has pledged to hold its target interest rate near zero at least as long as the unemployment rate is above 6.5 percent, so long as the outlook for inflation does not exceed 2.5 percent.
The Fed’s preferred measure of inflation, the personal consumption expenditures index, showed prices rising 1.4 percent in the 12 months ended in July.
George said she finds “little cause for alarm” in low inflation readings. Prices will probably return toward the Fed’s 2 percent target, she said.
The Fed could provide more clarity on policy by providing a median estimate of where interest rates will be in future years, George said.
“The statement could include the median projected interest rate from the FOMC projections for the end of 2015. This is currently 1 percent,” she said.
George, 55, became chief of the Kansas City Fed in 2011, and was previously the Fed district bank’s No. 2 official under Thomas Hoenig, now vice chairman of the Federal Deposit Insurance Corp. She joined the Kansas City Fed in 1982 and spent much of her career in bank supervision.
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