Fed’s Yellen Backs Plan to Adjust QE Pace as WarrantedJoshua Zumbrun and Jeanna Smialek
Federal Reserve Vice Chairman Janet Yellen threw her support behind a proposal to vary the pace of the central bank’s bond buying based on changes in prospects for the world’s largest economy.
“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 yesterday in Washington.
Yellen is the latest Fed official to endorse a proposal by St. Louis Fed President James Bullard to reduce the pace of purchases as the economy improves or expand it in response to signs of weakness. 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 $85 billion in mortgage-backed securities and Treasury debt, a program known as QE for quantitative easing. Fed officials spoke before the Labor Department reported that employers added 88,000 jobs in March, fewer than the lowest forecast in a Bloomberg survey. The unemployment rate fell to 7.6 percent, the lowest in four years.
Consumer prices rose 1.3 percent in February from a year earlier, according to the Fed’s preferred gauge of inflation, less than the central bank’s 2 percent goal.
“Both legs of the dual mandate call for a highly accommodative monetary policy,” Yellen said to the Society of American Business Editors and Writers, referring to the central bank’s objectives from Congress for stable prices and maximum employment.
“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,” Yellen said.
New York Fed President William C. Dudley is among policy makers who say more progress is needed in putting Americans back to work. While the unemployment rate is “modestly lower” and payroll growth is “a bit higher,” the employment-to-population ratio and the rates of job finding are “essentially unchanged,” he said in a March 25 speech.
Dudley has also lent his support to the idea of altering the pace of purchases as the economic outlook evolves.
“At some point, I expect that I will see sufficient evidence of economic momentum to cause me to favor gradually dialing back the pace of asset purchases,” Dudley said. “Of course, any subsequent bad news could lead me to favor dialing them back up again.”
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 yesterday 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.
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 yesterday during a panel discussion in Dayton, Ohio moderated by Kathleen Hays of Bloomberg Radio. Chicago’s 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 the pledge to bring about substantial gains in the labor market. 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.”