Bullard Says Balance Sheet Growth Raises Fed Exit Concern
Federal Reserve Bank of St. Louis President James Bullard said central bank stimulus has been ramped up this year with the decision to increase outright bond purchases to $85 billion a month and that a growing balance sheet could be complicated to unwind.
“The current stance of U.S. monetary policy is considerably easier than it was in 2012,” Bullard said in a speech prepared for delivery today in Starkville, Mississippi. “The size of the balance sheet could inhibit” the Fed’s “ability to exit appropriately from the current very expansive monetary policy.”
Bullard, who votes on policy this year, yesterday predicted U.S. growth will accelerate to 3.2 percent in 2013, a pace he said would allow the Federal Open Market Committee to consider slowing its bond buying after this spring from a rate of $85 billion a month. Policy makers have pushed the benchmark interest rate close to zero and expanded Fed assets to a record exceeding $3 trillion to fuel growth and reduce 7.9 percent unemployment.
“As labor markets improve somewhat, the pace of asset purchases could be reduced somewhat, but not ended altogether,” Bullard said at Mississippi State University. “Without an end date, the Committee may have to alter the pace of purchases as news arrives concerning U.S. macroeconomic performance.”
Bullard told his audience that asset purchases could be reduced to “$75 billion or $65 billion” in response to improved data.
The St. Louis Fed leader told reporters after his speech the central bank could consider a formula to guide a slowing of asset purchases, for example, reducing monthly purchases by $15 billion for each tenth of a percentage point drop in unemployment.
“Something like that I think would be reasonable” though the committee hasn’t backed any kind of formulaic approach, he said. “I’m very cognizant we are not in that position right now.”
One challenge with a reduction in stimulus is that record profits that the Fed has turned over to the U.S. Treasury may disappear as the central bank shrinks its balance sheet and interest rates rise, Bullard said.
“We are remitting a lot to the Treasury today, on order of $80 billion or $90 billion. But those remittances will drop a lot” and may near zero, he said, citing a recent Fed paper. “Things are going to change dramatically, going forward.”
Bullard told reporters that monetary policy was appropriate in his view now. “We have room to maneuver” with inflation low.
In his prepared remarks, Bullard said changes in asset purchases should be made in response to changes in the labor market, including the unemployment rate, employment, hours worked, and Job Openings and Labor Turnover Survey data.
In one sign of an improving labor market, jobless claims decreased by 27,000, the most in a month, to 341,000 in the week ended Feb. 9, Labor Department figures showed today. Employers added 157,000 workers to payrolls in January after hiring a revised 196,000 the month before, and the unemployment rate climbed to 7.9 percent, Labor Department figures showed Feb. 1.
Current measures of inflation are “rather low,” which Bullard said may give the FOMC some leeway to continue asset purchases for longer than otherwise.
Bullard said the potency of Fed stimulus today may be misunderstood, because in December it replaced the end of its Operation Twist program, in which it swapped short-term Treasuries for longer-term bonds, with outright bond purchases.
“Open-ended outright purchases are a more potent tool,” he said. “2013 is characterized by a relatively potent open- ended outright asset purchase program combined with more effective threshold-based forward guidance.”
The Fed last month left unchanged its December link of its interest-rate outlook to economic thresholds, saying borrowing costs will stay low “at least as long” as joblessness exceeds 6.5 percent and if projected inflation won’t go beyond 2.5 percent between one and two years in the future.
The FOMC in September started a third round of asset purchases and expanded it in December, saying the quantitative easing will continue until the labor market is improving “substantially.”
Bullard, 51, 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 was the first Fed official in 2010 to call for a second round of asset purchases.
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.
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