Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, said the government shutdown reduces the odds the Federal Open Market Committee this month will taper $85 billion in monthly bond purchases.
“As it has turned out, October is looking less likely for a decision for the FOMC on tapering because of the government shutdown and the lack of data we might have otherwise received,” Bullard said today to reporters in St. Louis. “It has changed the odds” for the coming meeting.
The policy making panel is debating how to curb record stimulus amid a deadlock in Congress over the federal budget and a lack of agreement on raising the debt ceiling to avoid default. Most policy makers said the central bank will probably taper its bond purchases this year and complete the program in mid-2014, according to minutes of last month’s policy meeting released yesterday.
“The committee cited fiscal uncertainty as one of the factors that led to the decision not to taper in September,” Bullard said. “In retrospect, that was probably the right call.”
The FOMC at an Oct. 29-30 meeting will weigh the impact from the partial government shutdown while considering a reduction in its bond buying. The Fed every month is purchasing $40 billion in mortgage-backed securities and $45 billion in Treasuries to fuel economic growth and combat 7.3 percent unemployment.
Bullard said he is concerned the shutdown and debate over the debt limit could weaken the economy this quarter even as inflation persists at less than the Fed’s 2 percent target.
“If the economy is indeed weaker in this time frame from now to the end of the year, that would also seem to suggest we won’t see a pickup in inflation,” Bullard said. “We can afford to be patient with our quantitative easing program until we have seen inflation start to come closer to target.”
Bullard said he couldn’t prejudge the outcome of the FOMC meeting this month, adding a decision to taper would depend on economic data. He called October a “live meeting” for a decision on so-called quantitative easing.
U.S. stocks jumped today on optimism U.S. lawmakers will reach an agreement. The Standard & Poor’s 500 Index rose 1.7 percent, the most since Jan. 2, at 1:17 p.m. in New York. The 10-year Treasury yield increased four basis points to 2.7 percent, according to Bloomberg Bond Trader prices.
Bullard urged Congress and President Barack Obama to reach a fiscal agreement.
“It is just imperative we not go in this direction, get into a situation where we are not paying our bills,” Bullard said.
“We have a great position as a reserve currency in the world,” he said. “We have a reputation that is stellar enough to make us the safe haven in a crisis in the world, which has helped us enormously over the last five years. There is no reason to put that at risk with a self-inflicted wound.”
The St. Louis Fed president also said the president’s choice of Vice Chairman Janet Yellen to lead the Fed, announced yesterday, will keep policy on a steady course.
“The key word for a Yellen chairmanship will be continuity,” he said. “She has been in the middle of the action as far as designing monetary policy before the crisis and during the crisis. I would expect policies to be largely similar.”
Policy makers have been split on the impact of the shutdown on growth and the debate over tapering bond purchases. Richmond Fed President Jeffrey Lacker said last week a government shutdown shouldn’t reduce economic growth permanently, while Atlanta Fed’s Dennis Lockhart said a lack of government data will make him “somewhat more cautious” in considering whether to slow $85 billion in monthly bond buying.
The Fed last month unexpectedly refrained from reducing its $85 billion in monthly bond buying, saying it needs to see more signs of sustained labor market gains. Chairman Ben S. Bernanke said Sept. 18 the central bank would decide on whether to taper purchases based on “what’s needed for the economy.”
Bullard during the past two months has urged the Fed to hold off on adjusting so-called quantitative easing, saying any change should depend on whether inflation moves toward the Fed’s 2 percent target. Policy shouldn’t rely on central bank forecasts for the economy that have proven too optimistic in the past three years, he said.
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. That was followed by a second round of bond buying.
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