Plosser, Bullard Say Fed’s Asset Purchases Contingent on Jobs
Two Federal Reserve regional bank presidents said a decline in unemployment may prompt a halt to $85 billion in monthly bond purchases, speaking a day after the Fed indicated it may end the buying as early as this year.
Philadelphia Fed President Charles Plosser said yesterday the unemployment rate may fall to 6.8 percent to 7.0 percent by year end, which he said would meet the “substantial progress” required to stop purchases. A drop in joblessness near 7 percent could lead to an end to the Fed bond buying, said St. Louis Fed President James Bullard, who votes on policy this year.
Fed officials are debating when to end purchases of mortgage bonds and Treasury securities that are aimed at fueling economic growth and reducing 7.8 percent unemployment. The U.S. generated 155,000 jobs last month, according to a Labor Department report released yesterday. In addition, gains in wages and the workweek exceeded projections.
“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 this week. 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.
Bullard said in September he opposed the FOMC decision to begin a third round of asset purchases with the U.S. economy growing at about a 2 percent rate in the second half of last year and poised to accelerate in 2013. In July 2011, he became the first policy maker to call for a second round of bond buying, which the FOMC approved that November in a decision to buy $600 billion in Treasuries through June 2012.
The timing for an end to bond-buying is “contingent on substantial progress on employment,” said Plosser, who doesn’t vote on policy this year. He warned in 2012 that the Fed risked losing its credibility by beginning a third round of large-scale bond purchases in September.
“There is now a discussion about when will we see that,” Plosser said, referring to improvement in the job market.
“Some people think we will see that sooner rather than later,” he said at a conference in San Diego. “But we haven’t been very specific. That is a qualitative judgment call.”
At the Dec. 11-12 meeting, the Fed expanded its bond purchase program to offset the end of Operation Twist, in which the Fed swapped short-term securities for longer-term bonds.
Richmond Fed President Jeffrey Lacker, who was the sole dissenter of the December FOMC decision, warned yesterday that further monetary stimulus was unlikely to boost growth.
“At some point, we will need to withdraw stimulus by raising interest rates and reducing the size of our balance sheet, and the larger our balance sheet, the more vulnerable we will be to seemingly minor miscalibrations in policy,” Lacker said in a speech to the Maryland Bankers Association in Baltimore.
The FOMC said it will also keep rates near zero as long as joblessness is above 6.5 percent, inflation is projected to be no more than 2.5 percent and longer-term price expectations are well anchored. The Fed had previously said it will keep rates low through at least mid-2015.
Still, the Fed didn’t provide explicit guidance on when it will stop its bond purchases, instead saying it is waiting to see substantial improvements in the labor market. Chairman Ben S. Bernanke said Dec. 12 the bank can’t link the quantitative easing to indicators because the potential effects of bond- buying are less certain compared to the impact of interest rates.
The bond buying program is “supposed to be a state- contingent policy” linked to performance of the economy, Bullard said to reporters after a panel discussion at a San Diego conference. “Why are we talking about dates” for the end of bond buying?
Stocks (SPX) rose yesterday as the payrolls report showed the U.S. job market is on the mend. The Standard & Poor’s 500 Index increased 0.5 percent to 1,466.47.
“I have been very clear all along. I have had the view that the efficacy of asset purchases is not very high” and “there are risks associated with these policies that will occur down the road,” Plosser said in San Diego.
“In the last two years unemployment has come down by almost 2 percentage points -- about 1 percentage point a year,” and that may occur again this year, he said.
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