Federal Reserve Bank of St. Louis President James Bullard said Fed officials will probably be careful about altering the pace of their reductions to bond buying because of a potentially significant impact on markets.
“If we move off our baseline, it’s going to have pretty big repercussions,” Bullard said today in an interview at Bloomberg’s headquarters in New York. “We’d be cautious in using that -- it’s going to have to be a situation where you’re pretty sure things are moving off track.”
Fed Chair Janet Yellen yesterday signaled in testimony to the House Financial Services Committee that the bar is high for changing her predecessor’s policy strategy of trimming stimulus in “measured steps.” Fed officials in December announced a $10 billion tapering in monthly asset purchases, and repeated the move last month with a cut of the same size to $65 billion.
Only a “notable change in the outlook” for the economy would prompt policy makers to slow the pace of tapering to bond buying, Yellen said in Washington.
Bullard said he is “still optimistic” about the outlook for the economy, predicting growth of 3 percent or more this year. He said he hasn’t “seen anything” to warrant a less favorable view.
Hiring rose by 113,000 last month, less than the 180,000 gain that was the median forecast of economists surveyed by Bloomberg, following a 75,000 increase in December.
The Standard & Poor’s 500 Index was little changed after the best four-day rally in a year. The yield on the 10-year Treasury note rose 0.04 percentage point to 2.76 percent at 4:03 p.m. in New York.
Bullard said the market’s reaction last June to a potential tapering, and the impact of the Fed’s surprise decision in September to maintain the pace of its asset purchases, illustrated that fluctuations in the amount of quantitative easing have “powerful” consequences.
In June, global equity markets lost $3 trillion in the five days after former Fed Chairman Ben S. Bernanke said he might reduce his $85 billion in monthly asset purchases that year and end them by mid-2014. In September, the Fed refrained from tapering, reversing a rise in bond yields and pushing back expectations for a tightening of monetary policy.
“In both of these cases, it showed it really matters a lot,” Bullard said. “Flow-based purchases have been really a powerful tool.”
The Fed will probably move away from a pledge to begin considering higher interest rates when unemployment falls below 6.5 percent in favor of “qualitative” judgments of the economy, Bullard said today on a panel.
Policy thresholds -- committing the Fed to record low rates so long as the outlook for inflation doesn’t exceed 2.5 percent and unemployment is 6.5 percent or higher -- “have been very useful” and “served their purpose” by anchoring interest-rate expectations when unemployment was “much higher,” he said.
The jobless rate unexpectedly declined in January to 6.6 percent, according to a Labor Department report, just above the Fed’s 6.5 percent threshold for considering an increase in the benchmark interest rate.
“We all knew the day would arrive when the unemployment rate would go through the threshold,” and the “natural thing to do” is to switch to more qualitative guidance, he said.
Yellen made a similar point yesterday, saying policy makers meeting in March “would be looking at a broad range of data on the labor market, including unemployment, job creation and many other indicators of labor market performance.”
Dallas Fed President Richard Fisher, who votes on policy this year, said today he believes the Fed should consider changing its so-called forward guidance, including its policy thresholds.
“I am in favor of exploring this,” Fisher said in an interview at the Dallas Fed.
“We are going to have to have intensive discussion,” he said. “It is a matter of providing clarity.”
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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