Bullard Calls Yellen 6-Months Comment in Line With Survey
Federal Reserve Bank of St. Louis President James Bullard defended Janet Yellen’s comments on interest-rate increases, saying her outlook is in line with private surveys on when the central bank might start tightening policy.
Treasury yields jumped March 19 after Yellen said in her first press conference as Fed chair that rates could rise “around six months” after asset purchases end, most likely in the fall.
Bullard, speaking in Washington today, said “the surveys that I had seen from the private sector had that kind of number penciled in as far as I knew.”
“That wasn’t very different from what we had heard from financial markets, so I think she’s just repeating that at that time period,” Bullard said at a roundtable at the Brookings Institution. Bullard doesn’t vote on policy this year.
Bullard’s comments suggest “he might be pushing back” to counter the view in the markets that the Fed might raise interest rates sooner than expected, said Aneta Markowska, chief U.S. economist at Societe Generale SA in New York.
“They didn’t intend to change anything in terms of the market’s timing of the liftoff,” she said. “That wasn’t their intent and I think that’s what he’s trying to get across. The intention was just to reaffirm what they believed the market expectation was at the time.”
Treasury 30-year bonds rose today for the first time in three days as investors reevaluate how quickly Fed officials will increase interest rates. Bond yields fell six basis points, or 0.06 percentage point, to 3.61 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices.
The Fed this week announced its third straight $10 billion reduction in the monthly pace of asset purchases, to $55 billion.
Dallas Fed President Richard Fisher, who is a voting member of the policy-setting Federal Open Market Committee (FDTR), said in a speech in London that the timetable makes it “pretty clear by October, if we continue at this pace, that our large-scale asset purchases will be terminated.”
He said market reaction to the policy outlined this week suggests some found it “disagreeable even if it is sound.”
The FOMC this seek said it will look at a “wide range of information” in deciding when to raise its benchmark interest rate, dropping guidance tying borrowing costs to a 6.5 percent unemployment rate. The central bank also released new economic projections, which showed that officials expected higher interest rates by the end of 2015 and 2016 compared with estimates released in December.
Fisher suggested investors were placing too much emphasis on the change in forecasts, which the Fed illustrates as dots plotted on a chart.
There is a “fixation if not a fetish on the dots,” he said at the London School of Economics. The change in forecasts by Fed officials came before this week’s meeting, he said.
“Somehow, this was read as a massive shift,” Fisher said. “These are our best guesses.”
Fisher also said the Fed may consider boosting the interest it pays on excess bank reserves to control short-term interest rates after it winds down asset purchases.
“It is a tool we can use particularly in the exit side once we start, which I believe is quite out there in the future, moving the short-term base rate,” he said. “I am not going to put a time frame on it because it will be quite some time after we stop” large-scale asset purchases.
Minneapolis Fed President Narayana Kocherlakota was the only policy maker to dissent from the March 19 statement. Kocherlakota said today that the omission of quantitative benchmarks for policy fosters uncertainty and undercuts the Fed’s commitment to bring inflation back toward its 2 percent target.
An index of inflation watched by the Fed rose 1.2 percent from a year earlier in January and hasn’t exceeded 2 percent since March 2012.
Bullard said he has “been worried about” inflation persisting at below-target levels.
“I do think that probably the best thing you can say is that it does look like it bottomed out,” he said. “Maybe it is coming up a little bit.”
Bullard said he continues “to predict we will go back to target.” Still, he said, if inflation “takes another step down, I think there will be a lot of pressure on the committee.”
Both Fisher and Bullard said the Fed is watching for signs of asset-price bubbles developing.
“We are seeing some exhibitions of market risk,” including margin accounts “at a historic high,” Fisher said.
While the Fed is vigilant about financial risk, Bullard said, it would be incorrect to conclude policy makers have a “preoccupation” with discouraging risk-taking.
The financial crisis “was hugely costly to the U.S. economy and the global economy,” Bullard said, and so it’s natural for policy makers to have an attitude of “once bitten, twice shy.”
Other Fed officials have also said the Fed must look out for signs of financial excess.
“The task for monetary policy will be to provide continued support as long as necessary, and to return policy to a normal stance over time without sparking inflation or financial instability,” Governor Jerome Powell told lawmakers this month. “This will require a careful balancing, as there are risks from removing monetary accommodation too soon as well as too late.”
U.S. regulators, including the Fed, are on the lookout for signs of froth in the market for non-investment-grade leveraged loans.
Starting last September, the Fed and the Office of the Comptroller of the Currency sent letters to banks giving them 30 days to come up with a plan for tighter policies, according to four people familiar with the missives. Recipients included Barclays Plc, Citigroup Inc., Deutsche Bank, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and UBS.
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