Fed’s Bullard Urges Cutting QE Pace if Data Stay Strong
Federal Reserve Bank of St. Louis President James Bullard said he expects U.S. growth to gain enough momentum to let the central bank reduce the pace of asset purchases as early as the middle of the year.
“We should think about tapering or adjusting the program,” Bullard said yesterday in an interview in Washington. “If you get some good data for a couple of months, maybe you’d say, ‘Okay, we go back to $75 billion per month instead of $85 billion or something like that.’”
The St. Louis Fed president said he expects the U.S. unemployment rate, 7.9 percent in January, will drop to the “low 7s” by year’s end, which he said would meet the Federal Open Market Committee’s test of “substantial improvement” in the labor market needed to end purchases. “Almost anybody would have to say that would be substantial improvement compared to where we were at the time of the launch of QE3,” he said.
Yet it would be problematic to stop expansion of the balance sheet at year’s end without slowing purchases earlier, Bullard said.
“You don’t want that cold turkey aspect to the program,” he said. “If we got some good signs through the spring or the summer, then I think we could throttle back just a little bit without saying you are going to end the program on any particular day.”
Bullard backed the FOMC’s decision this week to continue purchasing securities at the rate of $85 billion a month, the third round of a policy known as quantitative easing or QE, after growth stalled last quarter. Policy makers have pushed the benchmark interest rate close to zero and expanded Fed assets to more than $3 trillion to spur growth and reduce unemployment.
Bullard spoke in yesterday’s interview immediately after the release of last month’s employment data. Payrolls rose 157,000 following a revised 196,000 advance in the prior month and a 247,000 surge in November, Labor Department figures showed. The jobless rate increased from 7.8 percent.
Stocks rallied, sending the Dow Jones Industrial Average above 14,000 for the first time in five years, while Treasuries fell. Ten-year note yields rose three basis points, or 0.03 percentage point, to 2.02 percent at 5 p.m. New York time yesterday, according to Bloomberg Bond Trader data. Earlier, yields dropped as low as 1.92 percent. The Standard & Poor’s 500 Index rose 1 percent to 1,513.17.
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. His speeches and interviews moved the two-year Treasury yield more than those of any other Federal Open Market Committee member in 2011, according to a Macroeconomic Advisers report.
He was the first Fed official in 2010 to call for a second round of asset purchases. 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.
The St. Louis Fed president’s support of the FOMC purchases came after he last month offered a mixed assessment of bond buying, calling it a “very aggressive policy” that is “making me a little bit nervous.” Kansas City Fed President Esther George dissented from the decision in her first vote, citing concern that record stimulus could increase the risk of financial instability.
Bullard said the three-month average payroll growth of 200,000 jobs a month shown in yesterday’s jobs report is “an encouraging sign for the U.S. economy.”
“The 200,000 a month for three months is impressive,” he said. “Unemployment did tick up but generally speaking unemployment is down from where it was last September when the Federal Reserve first went into QE3,” he said.
Bullard said he continues to expect growth of about 3 percent this year with unemployment falling to close to 7 percent by year’s end.
“I’m somewhat more optimistic than most about the U.S. economy in 2013,” Bullard said. “Basically some of the uncertainties the economy faced in 2012 have been mitigated to some degree, and the leading one is Europe.”
Federal Reserve Bank of New York President William C. Dudley echoed Bullard’s optimism about the international economy yesterday, which he said is “gradually improving” in a trend that benefits U.S. growth. “Things aren’t perfect but I think that things are definitely improving and that will be helpful for the U.S. outlook,” Dudley said yesterday in response to audience questions after a speech in New York.
Bullard said monetary policy is “quite a bit easier” now than last year because outright purchases of assets have a greater impact than Operation Twist, in which the central bank swapped short-term Treasuries for longer-term bonds. “I don’t think financial markets have quite internalized how easy monetary policy is,” he said.
The U.S. housing market turned the corner toward expansion last year as well, Bullard said.
“Prices are up, sales are up, people are happier,” Bullard said. “I think this will be a plus now going forward.”
Bullard said he disagreed with the FOMC’s statement’s emphasis on “downside” risks. “I think the risks are balanced,” he said.
The St. Louis Fed president said he chose not to dissent from the January statement because it was a continuation of policy from December and because of respect for the policy committee’s collegiality. Some Wall Street economists had said he might dissent at the meeting.
“I prefer to try to convince my colleagues rather than try to dissent a lot,” he said.
In addition, a fall in inflation gives the Fed some room for stimulus, Bullard said.
“I’ve been a little surprised on this,” Bullard said. Asked whether falling prices was a concern, he said, “I hope not. I think our QE program is mitigating that risk.”
The Fed this week said inflation has been “somewhat below” its long-run target of 2 percent. An index of inflation tied to spending patterns rose 1.3 percent in the year ended December.
Chairman Ben S. Bernanke indicated last month he’ll closely scrutinize the potential costs of asset purchases. “So far, we think we are getting some effect, it is kind of early,” Bernanke said on Jan. 14 at the University of Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor.
Minutes from the FOMC’s December meeting showed that policy makers debated when to end the monthly purchases of $45 billion in Treasuries and $40 billion in mortgage bonds. The central bank has pledged to continue the buying until the labor market improves “substantially.”
Policy makers who provided forecasts were “approximately evenly divided” between those who said it would be appropriate to end the purchases around mid-2013 and those who favored a later date, the minutes said.
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