Federal Reserve Bank of St. Louis President James Bullard said that he sees the possibility of U.S. unemployment dropping to 7.1 percent by the end of this year, which could warrant pulling back the central bank’s $85 billion a month of bond purchases.
“I think that unemployment will continue to tick down through 2013,” Bullard said today in an interview on CNBC television. A 7.1 percent rate “would probably be substantial improvement” in the labor market, he said, referring to the Fed’s goal for halting its open-ended monthly purchases.
Federal Reserve officials are debating when to halt their $85 billion a month of mortgage-bond and Treasury purchases. The buying program was designed to boost an economy that generated 155,000 jobs last month and saw the unemployment rate at 7.8 percent.
“Several” members of the Federal Open Market Committee said it would “probably be appropriate to slow or stop purchases well before the end of 2013,” according to minutes of their Dec. 11-12 meeting released yesterday. A “few” were willing to let the program run to the end of the year while “a few others” didn’t give a time frame.
Asked about the minutes, Bullard said “Why are we talking about dates? The idea is to have state-contingent policy.”
At the FOMC’s December meeting, the committee ceased linking its outlook for its target interest rate to the calendar, and instead specified the economic conditions that would prompt an increase.
Fed presidents rotate voting on monetary policy, with Bullard scheduled to slide onto the committee at the FOMC’s January 29-30 meeting. Also joining the committee are Boston’s Eric Rosengren, Chicago’s Charles Evans and Kansas City’s Esther George.
Bullard cautioned lawmakers in Washington that a looming battle over whether to raise the U.S. Treasury’s legal borrowing limit could be risky.
“The debt ceiling is a dangerous thing to fight over,” Bullard said. “It did not go well in 2011.”
When partisan gridlock last brought the government to the brink of default in August 2011, the stock market fell and Standard & Poor’s cut the nation’s credit rating. After House Speaker John Boehner, an Ohio Republican, withdrew from negotiations on July 22, 2011, the S&P 500 Stock Index fell more than 16 percent in the next 11 trading days.
Bond investors were unrattled. Yields on 10-year U.S. Treasury notes declined from 2.96 percent on July 22 to 2.56 percent on Aug. 5, 2011, the day of the S&P downgrade. Yields continued to drop, reaching 1.72 percent on Sept. 22 of that year.