Three Federal Reserve regional bank presidents differed over the timing for reducing the Fed’s $85 billion in monthly bond buying, with one backing a tapering next month if the economy remains strong and two others saying policy makers should take time to assess economic data.
“We can take our time” on slowing purchases, St. Louis Fed President James Bullard, who holds a vote on policy this year, said in a Bloomberg Radio interview from Jackson Hole, Wyoming. San Francisco’s John Williams told CNBC he wants to “taper our purchases later this year” if the economy doesn’t flag, while Atlanta’s Dennis Lockhart said he “would be supportive” of slowing purchases next month if the expansion holds up.
Williams didn’t rule out a tapering next month. Debate among policy makers over whether to start tapering unprecedented bond purchases in September has roiled financial markets since May, pushing U.S. mortgage rates to a record gain and driving down developing-nation stocks and currencies. Lockhart and Williams won’t vote on policy until 2015.
Emerging-market stocks worldwide have slumped about $1 trillion since May, data compiled by Bloomberg show.
The MSCI Emerging Markets Index has declined 12 percent this year, compared with a 13 percent gain for the MSCI World Index of companies in advanced economies. India’s S&P BSE Sensex and Indonesia’s Jakarta Composite Index both fell to 11-month lows this week, while Turkey’s lira fell to a record low versus the dollar.
Treasury 10-year yields touched a two-year high of 2.93 percent yesterday on speculation the Federal Open Market Committee will slow its large-scale asset purchases next month. The yield was 2.84 percent at 10:40 a.m. in New York trading.
Fed policy makers have pledged to maintain $85 billion in monthly buying until the job market improves substantially. Some Fed officials have said the purchases, while aiding the job market, have stoked excessive risk taking in assets from junk bonds to farmland.
The interest rate on a 30-year fixed-rate mortgage rose to a two-year high of 4.58 percent this week, according to data compiled by Freddie Mac. It soared a record 35 percent in the 10 weeks ended July 11.
“I’m looking at the data as whether they are denying or undermining the outlook I have in my head” for a continuation of modest growth and some improvement, Lockhart said in an interview from the Fed’s annual monetary conference in Jackson Hole, Wyoming. “On that basis, you can get to a point where you can take a cautious first step, which is the way I’m thinking about what we conceivably might do, and justify that, so I don’t rule out September.”
Minutes of the last FOMC meeting released this week show policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to taper purchases this year if the economy strengthens, with a few saying a reduction may be needed soon.
“Almost all committee members agreed that a change in the purchase program was not yet appropriate,” and a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan,” minutes of the July 30-31 meeting show.
The FOMC will probably taper the unprecedented stimulus program at its Sept. 17-18 meeting, according to 65 percent of economists surveyed by Bloomberg Aug. 9-13. The first step may be to taper monthly purchases by $10 billion to a $75 billion pace, according to the median estimate in the survey of 48 economists. They said buying will probably end by mid-2014.
“Inflation is running low so for that reason I’ve been arguing that we don’t have to be in a hurry” to dial down bond purchases, Bullard said.
The Fed’s preferred gauge of inflation showed prices rising 1.3 percent in the 12 months ended June, well below the central bank’s 2 percent target. The Fed cut the main interest rate to zero in December 2008 to spur economic growth and combat unemployment.
“The decision when and if to taper later this year will depend on the data, and specifically are we still seeing signs of positive momentum,” Williams said.
“I’m not going to speak about what meeting or not, but I do think that if the data continue to progress as we’ve seen, then I do agree that we should edge down or taper our purchases later this year,” he said.
Gross domestic product rose at a 1.7 percent annualized rate in the second quarter, after a 1.1 percent gain in the first, Commerce Department data show.
Payroll growth over the past six months has averaged almost 200,000, compared with a 141,000 average in the six months before September, when the FOMC announced a third round of bond buying. Also, jobless claims fell to 320,000 in the week ended Aug. 10, the least since October 2007.