Fed Debate Moves From Tapering to Extending Bond Buying
Debate among Federal Reserve policy makers is shifting away from the timing of a reduction in bond buying to the need to extend record stimulus as inflation cools and 11.7 million Americans remain jobless.
At their meeting last month, several members of the Federal Open Market Committee advocated slowing purchases and stopping them by year-end. Since then, seven have voiced support for maintaining the current pace, including five who vote on the policy making panel: Governor Daniel Tarullo, New York Fed President William C. Dudley, James Bullard of St. Louis, Chicago’s Charles Evans and Boston’s Eric Rosengren.
“We heard a lot of discussion earlier in the year on the timing of tapering,” Ward McCarthy, chief financial economist at Jefferies Group LLC. in New York and a former Richmond Fed economist, said in a Bloomberg Radio interview yesterday. “Some of the more recent developments -- the slowdown in the economy, the somewhat disquieting inflation data -- has taken that off the table for now.”
With the Fed far from meeting its mandates for stable prices and full employment, policy makers next week will probably affirm a pledge to keep buying bonds until the job market improves “significantly,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington and a former Fed economist.
“It’s going to be full throttle until the end of this year,” said Gagnon, referring to the purchases that have pushed the Fed’s balance sheet to a record $3.3 trillion. The FOMC plans to meet April 30-May 1.
Consumer prices in February rose 1.3 percent from a year earlier, matching the smallest increase since October 2009 and falling short of the Fed’s 2 percent goal, according to a gauge watched by policy makers. Last month’s 7.6 percent unemployment rate exceeds the 5.2 percent to 6 percent level Fed officials consider to be full employment.
In February, Bullard urged reducing asset buying by $10 billion to $15 billion. This month he said the committee was moving “full steam ahead.”
“I’d of course be giving serious thought” to additional stimulus if disinflation persists, Richmond Fed President Jeffrey Lacker, who voted against the bond program last year, said last week -- while adding he doesn’t think that will happen. The Minneapolis Fed’s Narayana Kocherlakota also said this month weaker inflation may be reason to consider more accommodation.
Treasuries fell on April 10 after minutes of the March FOMC meeting showed several members advocated slowing purchases this year, with the 10-year note yield climbing to 1.80 percent from 1.75 percent. The yield today increased 0.1 percentage point to 1.72 percent as of 10 a.m. in New York, near a four-month low.
The New York Fed’s Dudley this week indicated his support for continued quantitative easing, saying gains from the $85 billion in monthly bond buying have exceeded expectations while posing limited risks to inflation and financial-market stability.
“After reviewing the efficacy and costs of this program, I have concluded that that efficacy has been as high or higher than I expected at the onset of the program and costs the same or lower,” Dudley said in a speech in New York.
Dudley and other champions of easing say the monthly purchases, which include $40 billion in mortgage-backed securities, are stoking growth by reducing the costs of home loans.
The interest rate on a 30-year fixed mortgage declined to 3.41 percent last week, compared with 3.55 percent when the Fed started its third round of quantitative easing in September, according to data compiled by Freddie Mac.
“After a long period of being a drag on the economy, the housing market is now providing lift to economic activity, with upward trends evident in housing starts, home sales and home prices,” Dudley said in an April 16 speech to the Staten Island Chamber of Commerce.
Residential investment may add 0.5 percentage point to growth this year, compared with a 0.4 percentage-point reduction in 2009, he said.
“Rising home prices can create positive spillovers to the rest of the economy as higher home prices lift household wealth and reduce the number of homeowners with negative equity,” Dudley said.
Gains in share prices stoked by expectations of continued Fed easing have also boosted wealth. The Standard & Poor’s 500 Index advanced 0.3 percent to 1,583.85 today to extend its gain this year to 11 percent. The benchmark gauge for U.S. equities remains near its all-time high of 1,593.37 on April 11.
Sales of new homes increased in March, capping the best quarter for the industry since 2008. The average pace of new and existing-home sales combined climbed to 5.36 million in the first quarter, the strongest since the third quarter of 2007, according to calculations by Bloomberg.
“Housing has certainly seen positive support from quantitative easing as low interest rates support refinancing and new purchases,” said Michelle Meyer, senior U.S. economist at Bank of America Corp. in New York. “Housing is crucial to generating a sustainable recovery in the U.S.”
Stimulus has also helped bring down the jobless rate faster than Fed projections, even as 11.7 million Americans remained out of work on a seasonally adjusted basis as of March.
Unemployment was 7.8 percent in September. At their meeting that month, FOMC participants forecast a decline in unemployment to 7.6 percent to 7.9 percent by the end of this year.
In March, with the joblessness declining to 7.6 percent, officials again cut their projections to 7.3 percent to 7.5 percent. They probably expect the third round of bond buying to reduce unemployment by as much as 0.4 percentage point, said Nathan Sheets, global head of international economics at Citigroup Inc. in New York.
“They are clearly getting these kinds of effects,” said Sheets, the Fed’s director of international finance from 2007 until 2011. “If anything, the program may even be a bit more powerful” than officials anticipated.
Even so, officials are on guard for a springtime slowdown after job growth sagged to 88,000 in March from 268,000 the previous month.
Reports from the Commerce Department showed retail sales fell in March by the most in nine months, while demand for durable goods slumped by the most in seven months.
Economic growth will probably slow to a 1.5 percent annual pace in the second quarter following a gain of 3 percent in the first three months of the year, according to the median estimates of 69 economists in an April 5-9 survey by Bloomberg News. The Commerce Department will announce first-quarter GDP tomorrow.
“I don’t think we should be complacent” about the economic outlook, Evans said last week in a speech in Chicago urging continued bond buying. “I would not be surprised if we end up doing this until late 2013, ultimately ending the program in 2014 at some point.”
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