Fed’s Tarullo Wants Consistent Job Growth Before Curbing QE

Federal Reserve Governor Daniel Tarullo said that while some economic data have exceeded expectations, he would like to see more consistent job growth before he can support curbing quantitative easing.

“At the very least what I’d like to see is some good healthy peaks that have job creation well above the rate of new entrants into the labor market, followed not by valleys that take back some of that progress but at the very least by a nice plateau that can be the basis for some more peaks later,” Tarullo said today in a CNBC interview.

The Federal Open Market Committee is debating how long it should continue $85 billion in monthly purchases of Treasuries and mortgage bonds aimed at boosting economic growth and reducing the 7.7 percent unemployment rate. Chairman Ben S. Bernanke and his colleagues reiterated March 20 they will press on until the labor market outlook improves “substantially.”

The FOMC’s standard for substantial improvement in the job market outlook is a “forward-leaning, forward-looking kind of standard,” Tarullo said today. The large-scale asset purchases “are trying to create some more traction for the economy on the road to maximum employment consistent with price stability, not to actually reach that destination.”

Employers in the world’s largest economy added 236,000 workers in February, lifting the six-month average pace of job creation to 186,500. The Labor Department may say April 5 that payrolls last month increased by 195,000, according to the median of 83 economist estimates in a Bloomberg survey. The economy grew at an 0.4 percent annual rate in the fourth quarter, up from a prior estimate of 0.1 percent.

2010, 2011

“There have been a fair number of data points that have been above expectations, but remember this has happened before,” Tarullo said, citing slumps in the pace of job growth in 2010 and 2011. “We had some increases that lasted for a few months in job creation and then they were followed by valleys.”

Unprecedented quantitative easing that has expanded the Fed balance sheet to a record $3.2 trillion deserves continued support because the benefits of boosting economic growth that’s still too weak to reduce unemployment outweigh the risks of the asset purchase program, Tarullo said.

“Of course there could be costs but there are certainly benefits,” Tarullo said. “At this point certainly my judgment is that the benefits outweigh the costs and that’s why I’ve continued to vote in favor of the program.”

The next FOMC meeting will be April 30-May 1 in Washington.

Bank Regulation

Tarullo also said today that the Fed and other regulators “haven’t ended” too-big-to-fail banks, and that any proposal to break up the largest lenders is a “matter for the Congress.” Still, the Fed can make liquidity requirements more stringent without action from lawmakers, he said.

Tarullo, 60, has led the Fed’s effort to implement the Dodd-Frank Act, the biggest overhaul of financial regulation since the 1930s, and pushed to raise capital standards for the largest banks, subject them to annual stress tests and boost scrutiny of their lending and trading practices.

Tarullo previously was a professor at the Georgetown University Law Center in Washington and an aide to President Bill Clinton. He was nominated by President Barack Obama and has served on the Fed board since January 2009.

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