The U.S. Federal Reserve won’t make major policy changes regardless of who leads the central bank after Chairman Ben Bernanke’s term ends in January, said Jan Hatzius, Goldman Sachs Group Inc.’s chief economist.
“I don’t think you’re going to see a major change in the approach, whoever is the next Fed chairman,” Hatzius said, speaking on Bloomberg Television’s “Market Makers” with Erik Schatzker and Sara Eisen. “The uncertainty is probably more limited than in past episodes.”
Hatzius said that in general “the Fed is being viewed as having done a good job over the last few years” and “there is a sense that things, while they’re still very sluggish, are gradually getting better.”
The Federal Open Market Committee released its policy decision and economic outlook at 2 p.m. today at the conclusion of its two-day meeting in Washington. The central bank will continue making $85 billion in monthly bond purchases in an effort to spur employment growth and speed economic expansion.
Hatzius, speaking before the meeting, said it remains unclear what data would prompt the central bank to reduce the unprecedented asset purchases, which have expanded the Fed’s balance sheet to a record $3.4 trillion.
While the bank has specified that it will keep the main interest rate near zero at least until unemployment dips below 6.5 percent and as long as inflation projections don’t exceed 2.5 percent, policy makers have said only that they are looking for the labor market to improve “substantially” before scaling back asset purchases.
“They just haven’t managed to come up with a commonly-agreed sort of set of indicators that would point to reduced purchases,” Hatzius said.
Hatzius said measures of the speed of labor market growth, such as payroll growth and hiring and quit rates, are more important than the overall level of unemployment.
“The key is, I think on the labor market side, a sufficient pace of improvement,” he said. “If more people were to quit their jobs, that’d be an indicator that people felt better about the momentum in the labor market.”
Inflation has gained importance in the past six months, Hatzius said, as it has moved below the Fed’s 2 percent target.
“That would be one other reason for going slow in terms of scaling back,” Hatzius said.
A gauge of consumer prices excluding food and energy that is watched by the Fed rose 1.1 percent in the year through April, matching the smallest gain since records started in 1960. With inflation below the Fed’s 2 percent long-run goal and the jobless rate at 7.6 percent, the Fed is falling short of its mandate to ensure stable prices and maximum employment.
Low inflation gives the Fed room to continue its monthly bond purchases.
The central bank will probably wait to taper its bond buying until its Oct. 29-30 meeting, when it will cut its monthly purchases to $65 billion, according to the median estimate in a June 4-5 Bloomberg survey of 59 economists. By then, inflation will be rising toward the Fed’s target, accelerating to 1.3 percent in the third quarter and 1.5 percent in the fourth quarter, according to economists’ estimates.