Fed’s Bullard Sees Difficulty Tying QE to Economic Levels
Federal Reserve Bank of St. Louis President James Bullard said it may be difficult to tie the central bank’s $85 billion monthly bond purchases to numerical levels of unemployment and inflation.
After settling a debate over how long to hold interest rates near zero, Fed officials are discussing when to halt their purchases of Treasuries and mortgage-backed securities. At its December meeting, the Federal Open Market Committee agreed to hold the target interest rate near zero so long as unemployment remains above 6.5 percent and inflation stays below 2.5 percent.
“Attempts to also put thresholds on the timing of asset purchases may be a bridge too far,” Bullard said today to the Wisconsin Bankers Association in Madison, Wisconsin.
Bullard said last week that unemployment could drop to about 7 percent by the end of this year, which may be enough improvement for the FOMC to halt the purchases, known as QE3 for the third round of quantitative easing.
He said his forecast would be a continuation of the unemployment decline seen since October 2009 when the rate hit 10 percent. The rate has since declined about 0.7 percentage point per year, he told reporters after the speech.
If that pace continues the current 7.8 percent jobless rate could decline to around 7 percent by the end of this year and “would get us to 6.5 percent sometime in the middle of 2014,” Bullard said.
Achieving the Fed’s threshold on unemployment would “cause the committee, in my view, to rethink its interest rate policy but it would be for a good reason.”
The St. Louis Fed chief forecast the economy could grow 3.2 percent in 2013 and 2014 as inflation will remain near the Fed’s 2 percent goal. That’s more optimistic than the median estimate in a Bloomberg survey of 96 analysts, showing growth of 2 percent in 2013 and 2.8 percent in 2014.
The Standard & Poor’s 500 Index advanced toward a five-year high as better-than-estimated Chinese exports tempered a decline in technology shares. The index advanced 0.8 percent to 1,472.12 at 4 p.m. New York time, the highest level since December 2007.
The central bank began purchasing $40 billion a month of mortgage debt in September and announced purchases of $45 billion a month of Treasuries at their December meeting. If the program continues until year-end, purchases would total around $1 trillion and the Fed’s balance sheet would approach $4 trillion.
Bullard told reporters that “it’s a very aggressive policy and it is making me a little bit nervous that we’re over- committing to easy policy.”
Bullard’s concern was echoed earlier today by Kansas City Fed President Esther George. George said in her remarks that “a prolonged period of zero interest rates may substantially increase the risks of future financial imbalances and hamper attainment of the” Fed’s 2 percent inflation goal.
Fed presidents rotate voting on monetary policy, with Bullard and George scheduled to join the committee at the FOMC’s January 29-30 meeting. Also joining the committee are Chicago’s Charles Evans, who led the campaign to link interest rates to economic conditions, and Boston’s Eric Rosengren.
Minutes of the Fed’s December meeting show a split among policy makers over how soon the QE program should end. “Several” members of the FOMC said it would “probably be appropriate to slow or stop purchases well before the end of 2013,” according to the minutes. 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 the Fed will “have to make a judgment concerning the program as macroeconomic data arrive.”
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