Federal Reserve Bank of St. Louis President James Bullard said gains in the labor market since September 2012 could warrant a cut in the Fed’s $85 billion in monthly bond purchases.
“This provides the most powerful part of the case for tapering,” Bullard said today in St. Louis. “Two key labor market indicators have shown clear improvement over the last year: Unemployment and nonfarm payroll employment.”
Bullard voted for the Federal Open Market Committee decision this week to press on with bond buying while awaiting more evidence the economy has gained strength following a U.S. government shutdown last month. The federal closing reduced growth by 0.3 percentage point this quarter, according to the median estimate in an Oct. 17-18 Bloomberg survey.
The FOMC removed from its statement a reference to tightening financial conditions, which was one reason officials chose in September not to slow the pace of bond purchases.
“To the extent that key labor-market indicators continue to show cumulative improvement, the likelihood of tapering asset purchases will continue to rise,” Bullard said in a speech to the St. Louis Regional Chamber’s Financial Forum. “This is because the committee’s 2012 criterion of substantial improvement in labor markets gets easier and easier to satisfy on a cumulative basis as labor markets continue to heal.”
Bullard said the FOMC wants reassurance progress in labor markets “will stick.”
The current low inflation rate argues for delaying tapering, Bullard said to reporters after his speech. He declined to predict how he or other policy makers at an FOMC meeting on Dec. 17-18 will address the question of whether to reduce so-called quantitative easing.
“Inflation continues to run very low in the U.S. economy,” he said. “We have a lot of room on the inflation front. I would like to see inflation coming back towards target before we make a decision to taper.”
Bullard, who has been an advocate of an open-ended approach to bond buying, said he continues to back that approach rather than setting a dollar target for purchases.
The St. Louis Fed president during the past two months has urged the Fed to hold off on adjusting bond purchases, saying any change should depend on whether inflation moves toward the Fed’s 2 percent target. Policy shouldn’t rely on central bank forecasts for the economy that have proven too optimistic in the past three years, he has said.
Bullard today reiterated the view of the FOMC that the question of whether to reduce asset purchases isn’t pre-determined, but hinges on changes in economic data.
Asset-price bubbles are another focus for policy makers, Bullard said in response to audience questions, voicing concern about a rise in farmland prices.
“Bubbles is a huge issue for the committee, and will continue to be a huge issue going forward,” he said. “The thing about land prices right now is a lot of those purchases are not leveraged,” or financed with debt, so they are “not as dangerous” to the economy.
U.S. stocks were little changed today, with the Standard & Poor’s 500 index at 1,754.72 at 11:38 a.m. in New York after the Institute for Supply Management’s factory index rose. The 10-year Treasury yield rose four basis points, or 0.04 percentage point, to 2.60 percent.
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.
Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.