Fed Presidents Say Stock Decline Unlikely to Derail QE Taper

Two Federal Reserve district bank presidents signaled a decline in global stock markets probably won’t deter the Fed from further trimming bond buying that has pushed up central bank assets to $4.1 trillion.

“The hurdle ought to remain pretty high for pausing in tapering,” Richmond Fed President Jeffrey Lacker said after a speech today in Winchester, Virginia. Chicago’s Charles Evans said in Detroit that policy makers probably face “a high hurdle to deviate” from $10 billion cuts in monthly bond buying at each of their next several meetings. Evans and Lacker don’t vote on policy this year.

The Federal Open Market Committee last week reduced monthly bond buying by $10 billion for the second straight meeting, cutting purchases to $65 billion following gains in the job market and signs of stronger spending by businesses and households.

U.S. growth is strong enough to overcome a short-term slump in stocks and a cooling in emerging-market growth, keeping the Fed on track to dial down stimulus, according to 52 of 56 economists surveyed by Bloomberg today. They said the 5.8 percent decline in the Standard & Poor’s 500 Index this year through yesterday has no bearing on their first-quarter growth projection.

U.S. equities advanced, with the Standard & Poor’s 500 Index rebounding from its biggest drop since June, while stocks in developing nations extended their worst-ever start to a year. The S&P 500 rose 0.7 percent to 1,754.38 at 3:37 p.m. in New York.

Market Pull-Out

Global investors pulled $6.3 billion from developing-nation stocks in the week through Jan. 29, the biggest outflow since August 2011, according to Barclays Plc, citing data from EPFR Global. The MSCI Emerging Markets Index declined 0.8 percent to 919.48 and has fallen 8.3 percent this year.

The Fed’s reduction in bond buying has been “expected for quite some time,” and shouldn’t have been a “big surprise” to global financial markets, Evans said to reporters after a speech.

“Each country has a set of issues they need to deal with,” Evans said. “The moderate pace of tapering that we laid out in conjunction with our stronger forward guidance” on the path of the federal funds rate “provides an adequate amount of accommodation for the other foreign markets.”

Volatility worldwide has jumped. The Nikkei Stock Average Volatility Index climbed 9.8 percent today to its highest level since July, and the HSI Volatility Index of Hong Kong shares soared 21 percent, on pace for the biggest surge since 2011.

Index Declines

Europe’s VStoxx Index slipped 4.2 percent after gaining 10 percent yesterday.

The fall in equities hasn’t “affected the outlook for labor market conditions materially at this point,” Lacker said. “We linked the asset purchase programs to significant improvement in the outlook for labor market conditions. That has definitely occurred.”

The unemployment rate probably held steady last month at 6.7 percent, according to economists surveyed by Bloomberg News.

“The committee is always cognizant of global economic conditions and developments,” Lacker said at Shenandoah University, adding that his colleagues have to make policy choices focused on Fed goals for the U.S. economy. “We conduct policy to achieve price stability and maximum employment here in the United States.”

Policy makers last week left intact their forward guidance on the federal funds rate, saying it will probably “be appropriate” to hold the benchmark lending rate in a range of zero to 0.25 percent “well past the time” the unemployment rate falls below 6.5 percent, especially if inflation is forecast to remain below the Fed’s 2 percent target.

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