Fed’s Bullard Says Lower Jobless Threshold Might Be ‘Dangerous’Steve Matthews and Matthew Winkler
Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, said lowering the unemployment threshold for a possible interest-rate increase would risk credibility when the focus should be on raising inflation.
If the jobless level can be moved, “then how much credibility do you have for the threshold?” Bullard said in an interview at “The Year Ahead: 2014,” a two-day conference sponsored by Bloomberg LP in Chicago. “That is what I would be most nervous about. It might be a dangerous game to move thresholds around.”
Since December, the Federal Open Market Committee has said it would hold its target interest rate near zero “at least as long as” unemployment remained above 6.5 percent, so long as the outlook for inflation did not climb above 2.5 percent.
Minneapolis Fed President Narayana Kocherlakota has proposed lowering the unemployment rate threshold, saying that the Fed should hold rates low while joblessness remains above 5.5 percent. That view was endorsed yesterday by Charles Evans, the Chicago Fed’s president.
Bullard has instead proposed adding new guidance that the Fed wouldn’t raise its benchmark interest rate if inflation were below 1.5 percent, an idea he repeated today. Because the level would supplement rather than alter an existing threshold, the Fed’s credibility wouldn’t be sacrificed, he said.
’’You have to take the inflation target seriously, defend the target from the low level,’’ Bullard said, noting that the central bank’s preferred measure of price gains has been less than 1 percent annually. “I continue to be concerned about this issue.”
“We would have expected to see more inflation pressure at this point,” Bullard said. “We don’t have a good story” that explains its low level.
In minutes released today of their most recent policy meeting, Fed officials said they might reduce their $85 billion in monthly bond purchases “in coming months” as the economy improves.
Policy makers “generally expected that the data would prove consistent with the committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months,” according to the record of the FOMC’s Oct. 29-30 gathering, released in Washington.
In the interview and an earlier Bloomberg Television interview, Bullard said the FOMC will debate whether to slow asset purchases at its December meeting, with the decision to be influenced by the strength of economic data including November’s employment report.
“It is on the table,” Bullard said at the conference. “I am not sure we are going to do it” in December.
“A strong jobs report, I think, would increase the probability some for a December taper,” he said in the televised interview.
The FOMC has said it plans to press on with the current pace of bond buying until seeing substantial improvement in the outlook for the labor market. While U.S. employers last month added 204,000 workers, the Fed probably won’t taper its purchases until a March 18-19 policy meeting, according to the median of 32 economist estimates in a Bloomberg News survey Nov. 8. The next meeting is Dec. 17-18.
Bullard said cumulative progress in labor markets provides the strongest argument for tapering, while low inflation would be a factor suggesting hesitation on slowing stimulus.
Bullard said he expects U.S. growth to accelerate to 3 percent or more next year, while adding that his similar outlook a year ago for 2013 proved to be too upbeat.
“I think the right assessment of 2014 is still to be optimistic,” Bullard said in Chicago. “A lot of the drags affecting the U.S. economy are waning.”
In the interview, Bullard said Europe seems to be coming out of a recession.
“That will help the global situation,” he said. “There are reasons to be optimistic.”
In the U.S., Bullard said “deleveraging among households” is waning and the housing market has improved in the past 18 months.
The St. Louis Fed official also said cutting the interest rate paid on excess reserves didn’t seem to be likely to be used as a tool to stimulate the economy.
“I am not sure there is any momentum for this,” he said. “If the economy took a downturn, then I think we would look at it a lot harder.”
Retail sales in the U.S. rose 0.4 percent in October, a sign that consumer spending was resilient during the government shutdown, a Commerce Department report showed today.