Fed’s Bullard Urges Wait for 2nd-Half Data Before Tapering
Federal Reserve Bank of St. Louis President James Bullard, who backed this week’s Fed decision to continue bond buying, said the Fed should wait for evidence the labor market and economy are strengthening before tapering purchases.
“The committee needs to see more data on macroeconomic performance for the second half of 2013 before making a judgment on this matter,” Bullard said today in a speech in Boston. While improvement is forecast, “it is important to wait to see if better macroeconomic outcomes materialize in the months and quarters ahead.”
Bullard backed the Federal Open Market Committee decision to keep buying $85 billion in securities each month after saying in a June 19 dissent that the committee needed to defend against inflation running too far below its 2 percent target. The FOMC echoed Bullard’s concern in its July 31 statement, saying “persistently” low price gains “pose risks” to the economy.
“The committee would not normally remove policy accommodation in an environment where inflation is below target and is projected to remain there,” Bullard said at the 2013 Municipal Finance Conference, hosted by Brandeis International Business School. He said there is a concern that “inflation may be pushed even lower by a decision to taper and hence the risk of deflation may increase.”
Half of 54 economists in a July 18-22 Bloomberg News survey expect the FOMC to trim asset purchases at a Sept. 17-18 meeting.
Fed officials have pledged to press on with bond purchases until achieving sustainable gains in the U.S. labor market. The FOMC this week cited “further improvement” in the labor market, while saying the unemployment rate “remains elevated.”
Measured by job growth and the unemployment rate, “labor markets have clearly improved since September 2012,” Bullard said. Still, other measures, such as labor-force participation, are “weak” and improvement is “considerably muddled.”
Employers added 162,000 jobs last month and the U.S. jobless rate dropped to 7.4 percent, Labor Department figures showed today.
The jobs report represented “basically good news” and the unemployment rate will probably decline further, Bullard said to reporters after the speech. He said he opposed setting any timetable for scaling back asset purchases, while describing a 7 percent unemployment rate as a “softer target” for an end to bond buying.
“Today makes it less likely they taper in September,” Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., said in a Bloomberg Television interview. “The labor market continues to improve but at a frustratingly modest pace,” and some indicators suggest improvement is “very fragile.”
U.S. stocks were little changed, with the Standard & Poor’s 500 Index declining less than 0.1 percent to 1,706.76 at 3:22 p.m. in New York. Treasuries gained, with the 10-year Treasury yield falling 0.1 percentage point to 2.61 percent.
In response to audience questions, Bullard said the central bank will probably hold mortgage-backed securities among its assets longer than it had expected.
“We are more inclined to hold these longer than we were previously,” he said after a speech in Boston. “We will probably hold mortgage backed longer” and “a couple years in the future make a decision on what to do.”
Chairman Ben S. Bernanke said in a press conference after the FOMC’s June 18-19 meeting that the Fed may trim its bond-buying program later this year and halt it around mid-2014 if economic performance tracks the central bank’s forecast. About half the committee’s 19 participants favor ending the program by year’s end, according to minutes released after the June meeting.
Bullard has been a leading voice for open-ended quantitative easing, with no set end date and the size of purchases varying in response to changes in economic data.
The Fed’s preferred inflation gauge, the personal consumption expenditures index, increased 1.3 percent through June.
The U.S. central bank began its third round of large-scale asset purchases in September by buying $40 billion a month of mortgage-backed securities. The Fed added $45 billion of monthly Treasury purchases in December.
Kansas City Fed President Esther George dissented this week as she has at every meeting this year, continuing to cite concern record accommodation may create financial and economic imbalances and increase long-term inflation expectations.
In speeches this year, George cautioned about excessive use of margin accounts at broker-dealers and leveraged loans, or packages of higher-risk commercial loans.
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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