Fed’s Yellen Favors Adjusting QE Pace as Outlook Changes

Federal Reserve Vice Chairman Janet Yellen said the Federal Open Market Committee should be prepared to alter its $85 billion monthly pace of bond buying based on changes in the economic outlook.

“Adjusting the pace of asset purchases in response to the evolution of the outlook for the labor market will provide the public with information regarding the committee’s intentions and should reduce the risk of misunderstanding and market disruption as the conclusion of the program draws closer,” Yellen said in a speech today in Washington.

Yellen’s comments support a proposal by St. Louis Fed President James Bullard to reduce the pace of purchases as the economy improves or expand it if the economy weakens. Chairman Ben S. Bernanke said in a press conference last month the FOMC is considering this strategy to “appropriately calibrate” its policy.

The central bank every month is purchasing a total of $85 billion in mortgage-backed securities and Treasury debt, a program known as QE for quantitative easing, as it seeks to reduce 7.7 percent unemployment and ensure the nation’s labor market improves “substantially.”

Bond buying has brought down borrowing costs and boosted home and auto sales, Yellen said in response to audience questions. “Housing is really beginning to recover in a way that I think is very convincing.”

No Signal

The 66-year-old Fed vice chairman said an end of asset purchases won’t signal that the central bank will soon increase its target interest rate.

“There will likely be a substantial period after asset purchases conclude but before the FOMC starts removing accommodation by reducing asset holdings or raising the federal funds rate,” Yellen said.

“At some point, the FOMC will return to a more normal approach to monetary policy,” she said, without suggesting an end to stimulus was near. Still, she said she is “encouraged by recent signs that the economy is improving and healing from the trauma of the crisis.”

The unemployment rate is expected to remain unchanged at 7.7 percent when the Labor Department issues its monthly jobs report at 8:30 a.m. tomorrow, according to the median estimate of a Bloomberg survey. Prices rose 1.3 percent over the last year, according to the Fed’s preferred gauge of inflation, less than the central bank’s 2 percent goal.

Two Legs

“Both legs of the dual mandate call for a highly accommodative monetary policy,” Yellen said to the Society of American Business Editors and Writers. “With unemployment so far from its longer-run normal level, I believe progress on reducing unemployment should take center stage for the FOMC, even if maintaining that progress might result in inflation slightly and temporarily exceeding 2 percent.”

Five central bank officials -- including Governor Daniel Tarullo, Chicago Fed President Charles Evans and St. Louis’s Bullard -- voiced support this week for the FOMC pledge to press on with asset purchases until the job market improves “substantially.”

Fed easing has helped push U.S. stocks to records. The Standard & Poor’s 500 Index rose 0.4 percent to close at 1,559.98 today after central banks in Japan and Europe reassured investors they will keep economies awash in cash. The yield on the 10 year Treasury fell 0.05 percentage point to 1.76 percent.

Job Creation

Several months of job creation exceeding 180,000 and declining unemployment would mean “in the second half of the year or in early 2014 it would be appropriate to consider the tapering off,” Atlanta Fed President Dennis Lockhart said today during a panel discussion in Dayton, Ohio. Chicago’s Charles Evans, speaking on the same panel, said he’d like to see payrolls at “200,000-a-month increases for like six months.”

The presidents’ numerical objectives help clarify a pledge to bring about substantial gains in the labor market. While Fed officials set different goals, they agree they’ve fallen short of their mandate to ensure full employment. Evans is an FOMC voter this year, while Lockhart is not.

Bernanke said in December that policy makers haven’t specified a numerical goal that would prompt the end of asset purchases because “we have a number of different things that we need to look at as we go forward.”

The Fed has expanded its balance sheet to a record $3.22 trillion through its bond purchases.

The FOMC will be in no hurry to slow its asset purchases this year with inflation below its target, Bullard said yesterday.

“It is full steam ahead right now,” Bullard said in a Bloomberg Radio interview. “I think that is exactly what the committee is doing.”

Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

Jeanna Smialek in Washington at jsmialek1@bloomberg.net

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