Federal Reserve Bank of St. Louis President James Bullard said the central bank may keep its monetary-policy unchanged until late this year, and that declining inflation expectations have curbed the need to begin withdrawing record stimulus.
“It does take some pressure off the Fed,” Bullard, 50, said in an interview at Bloomberg News headquarters in New York. “I take it seriously that market indicators of inflation have come down. The data has been softer, and these global uncertainties have weighed on markets.”
Fed officials are discussing how quickly to begin tightening policy after completing the purchase of $600 billion in U.S. Treasuries by the end of June. They are also discussing a strategy for the exit, with a majority favoring ending the policy of reinvesting proceeds from maturing securities first before raising interest rates or selling assets, minutes of their April 26-27 meeting showed today.
“We will get some more data through the summer, have some meetings in the fall and by that time we will have more information of how things are moving along,” he said to response to a question on how long the Fed would “hold” policy after June.
Policy makers have differed in public comments on the timing of an exit. Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said this month he favors raising the target interest rate this year, while Philadelphia’s Charles Plosser urged a pull-back in the “not-too-distant future.” New York Fed President William C. Dudley said the recovery hasn’t met the central bank’s goals.
Bullard said he sees Treasury securities as a key indicator of the public’s views on inflation. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, shrank to as low as 2.26 percentage points today from 2.67 points April 11.
Bullard said his and other Fed members’ forecasts for as much as 4 percent growth over the remainder of this year are more optimistic than most private forecasts, and the central bank would be slower to tighten policy if Fed forecasts aren’t met. Growth will be 2.7 percent for the year, according to the median of 66 economists surveyed this month by Bloomberg News.
“We need to see a bit stronger data,” he said. “If we don’t, we are going to have to mark down a little bit.”
“If it is a little weaker, you could stay on hold longer,” Bullard said. “If it is stronger, you could take a move toward a tighter policy sooner.”
Change From July
Bullard’s concern this year over inflation represents a change from last July, when he urged purchases of Treasuries to head off the risk deflation. He was the first Fed official to support a second round of so-called quantitative easing. Policy makers in November approved the asset purchase plan.
The St. Louis Fed president said any tightening campaign should begin by shrinking the Fed’s balance sheet, which could be done “passively” by not reinvesting maturing mortgage-backed securities or by outright asset sales.
“Allowing the runoff to occur seems to be a likely first step,” he said. “Whether you would supplement that with actual sales is controversial and undecided at this point.” Interest rate changes would represent “bringing out the big guns” and likely come later, he said.
“If you could get away with it, it would make sense to shrink the balance sheet a fair amount and then come with interest rate increases,” he said.
Asked how long it would take to return the Fed to a normal balance sheet, Bullard said “five years is a reasonable number.” Many participants in the April Federal Open Market Committee Meeting agreed with that timetable, according to today’s minutes.
“Obviously we would not dump a lot on the market at any one time,” he said. “You would sell in a controlled way.”
Bullard said signs of job growth are among the reasons he’s more optimistic than many economists. The Labor Department said May 6 the economy added 244,000 jobs in April, more than forecast by economists, while the unemployment rate climbed to 9 percent.
The U.S. central bank should move ahead with a formal inflation target now because of rising doubts in “parts of financial markets” about its commitment to stem price gains.
“I and many others are determined to get this done,” he said. “It is the best of times to make a decision on this.”
In other comments, Bullard said the European debt crisis has overtaken rising oil prices as the top risk for the U.S. economy, and he urged politicians in Washington to reach agreement on reducing budget deficits.
“I’m a little more worried about Europe than anything else,” Bullard said. Any move to restructure Greek debt, an idea floated by European Union finance ministers for the first time this week, “has the potential to rock global financial markets, so it has to be handled very carefully,” he said.
In the U.S., lawmakers and investors shouldn’t take comfort in low borrowing costs because markets are often “complacent” about the risk from excessive deficit spending, he said. The yield on the benchmark 10-year Treasury note was 3.18 percent at 4:07 p.m. in New York today, below its average of 4.08 percent during the last decade, Bloomberg data show.
“You cannot take too much comfort from the fact that ‘Oh, nobody is worried about this today,’ because when the crisis is upon you it will really hit,” Bullard said. “It’s like the markets are almost asleep about the whole issue until one day you wake up and it becomes the primary issue.”