Plosser Calls for Reducing QE Pace Citing Gains in Labor MarketJoshua Zumbrun
Philadelphia Federal Reserve President Charles Plosser said the Fed should begin reducing the pace of bond buying, citing gains in the labor market since the start of a third round of asset purchases in September.
“We have seen sufficient improvement to begin tapering our asset purchase program with the objective of bringing it to an end before year-end,” Plosser said today in remarks prepared for a speech in Hong Kong.
Several Fed officials favored cutting back bond purchases this year and halting the record stimulus by year-end, according to minutes of the March 19-20 meeting of the Federal Open Market Committee released yesterday. The FOMC pledged after its meeting to press on with $85 billion in monthly bond purchases until the labor market improves “substantially.”
“A few members felt that the risks and costs of purchases, along with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around midyear, with purchases ending later this year,” according to the minutes.
The Standard & Poor’s 500 Index yesterday rose 1.2 percent to 1,587.73 in New York, while the yield on the benchmark 10-year Treasury note climbed to 1.8 percent from 1.75 percent on April 9.
The FOMC met before an April 5 government report showed the U.S. added 88,000 jobs in March, the slowest payroll growth in nine months.
Seven central bank officials voiced support last week for the FOMC pledge to press on with asset purchases. The officials, commenting in speeches and interviews, include five who hold a vote on the FOMC: Vice Chairman Janet Yellen, Governor Daniel Tarullo, Chicago Fed President Charles Evans, St. Louis’s James Bullard and Boston’s Eric Rosengren.
Plosser said the March jobs report didn’t change his view about the need to curtail bond buying.
“Many observers have noted that the March employment report, released last Friday, was a disappointment,” Plosser said. “But I would remind everyone that monthly employment numbers are highly volatile and fluctuate a great deal from month to month.”
The Labor Department report included a revision of its initial estimate of job creation in February, suggesting more jobs were created that month, Plosser said.
“Such swings are not unusual,” he said. “Moreover, the first release is only preliminary and is subject to revision, and recently the revisions have tended to be upward.”
The Philadelphia Fed chief in 2011 dissented from two decisions to increase monetary stimulus. He said he also opposed the decision last year to begin a third round of asset purchases. Fed presidents rotate voting on monetary policy with Plosser, 64, scheduled to vote again next year.
The unemployment rate fell in March to 7.6 percent, the lowest level in more than four years. The jobless rate is still far from the Fed’s longer-run goal of 5.2 percent to 6 percent.
“While further progress would certainly be desirable, I believe the evidence is consistent with a significantly improving labor market,” Plosser said. “I want to emphasize that ending asset purchases is not the start of an exit strategy, nor would it indicate that an increase in the policy rate was imminent.”
Plosser said he forecasts the economy will grow about 3 percent this year and in 2014, and the unemployment rate may fall to 7 percent at the end of this year and 6.5 percent by the end of 2014.
Before raising interest rates, the Fed should reinvest its maturing assets into shorter-term securities, Plosser said. It should also raise the discount rate that it charges on direct loans to financial institutions.
Prior to the financial crisis, Fed officials kept the discount rate 1 percentage point above their target interest rate. The spread was reduced in 2008 to 0.25 percentage point above the main interest rate to ease financial stresses and increased to 0.5 percentage point higher in February 2010.
“There is little reason to maintain this crisis-initiated policy, and so we could begin to restore the spread to more normal, or non-crisis, levels,” Plosser said.