Bullard Says Fed Should Consider Delay in Ending QE

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James Bullard
James Bullard, president of the St. Louis Federal Reserve Bank. Photographer: Scott Eells/Bloomberg

The Federal Reserve should consider delaying the end of its bond-purchase program to halt a decline in inflation expectations, said St. Louis Federal Reserve Bank President James Bullard.

Bullard, who helped lay the intellectual groundwork for the Fed’s quantitative easing program, said U.S. economic fundamentals remain strong, and he blamed recent financial-market turmoil on downgrades in the outlook for Europe.

“Inflation expectations are declining in the U.S.,” he said in an interview today with Bloomberg News in Washington. “That’s an important consideration for a central bank. And for that reason I think that a logical policy response at this juncture may be to delay the end of the QE.”

Bullard is the first Fed official to publicly suggest the central bank should extend its asset-purchase program when policy makers meet later this month. U.S. stocks erased losses and Treasury yields rose on expectations the Fed will take action to insulate the U.S. from global economic weakness.

“We are watching and we’re ready and we are willing to do things to defend our inflation target,” Bullard said.

Fed officials are scheduled to next gather on Oct. 28-29 and have said they expect to end asset purchases after that meeting. The program has already been wound down to combined monthly purchases of $15 billion of Treasuries and mortgage backed securities, from $85 billion in December 2012.

Committee Intentions

“Fifteen billion by itself is not that consequential,” Bullard said. “But what is consequential is committee intentions on future QE, and we have certainly seen through the taper tantrum how important those can be.”

He was referring to an episode last year when Treasury yields shot up after then-Chairman Ben S. Bernanke said the Fed would start slowing bond-buying sooner than expected.

Bullard said he continues to forecast the first Fed interest-rate increase at the end of the first quarter, based on the expectation that the current global market turmoil won’t affect U.S. prospects. Economic growth could be bolstered by declines in oil prices and long-term interest rates, he said.

A pause in tapering would protect against “downside risk” and bolster inflation expectations, he said. “We could react with more QE if we wanted to.”

The Standard & Poor’s 500 Index rose 0.4 percent to 1,870.25 at 1:37 p.m. in New York after dropping as much as 1.5 percent. U.S. 10-year Treasury yields rose two basis points, or 0.02 percentage point, to 2.16 percent.

Bullard Paper

Bullard, who doesn’t vote on policy this year, has been seen as a bellwether 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 is a very practical voice at the Fed, and changes in his views often reflect the swing in the balance of risks in the economy,” said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina.

“The Fed is highly attentive to the outlook for the economy, and the outlook for the global economy has deteriorated,” Vitner said. “Inflation looks like it has decelerated and may decelerate further.”

Stocks, Oil

The 10-year Treasury yield fell below 2 percent yesterday for the first time since June 2013 as weaker-than-forecast economic data added to concerns that economic growth is slowing. That worry has helped push down stocks, oil prices, and measures of inflation expectations, while increasing the value of the U.S. dollar relative to trading partners.

The Fed aims for 2 percent inflation, as measured by the personal consumption expenditures price index, which was 1.5 percent in August and hasn’t exceeded 2 percent since March 2012. Expectations of future inflation, which are important because they can affect spending by businesses and households, have dipped in recent months alongside a decline in oil prices.

A Bloomberg measure of market forecasts for average inflation over the next five years was 1.49 percent at 1:41 p.m. in New York, compared with 2.1 percent in June.

The Fed has said its policies are dependent on evolving economic data as it seeks to steer the economy to full employment and stable prices.

“I am saying today that maybe we should invoke the data dependent clause on the tapering,” Bullard, 53, said. “I think that is our simplest step that we can take in this circumstance.”

On the other hand, he said U.S. economic fundamentals remain strong, and he hasn’t downgraded his forecast for growth of 3 percent or more in the second half of 2014 and 2015.

“The hard data on the U.S. is good,” he said. “The last jobs report was quite strong.” The jobless rate fell to 5.9 percent in September, and payrolls expanded by 248,000.

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