Bullard Sees Fed Swapping Thresholds for Qualitative Views

Federal Reserve Bank of St. Louis President James Bullard said the Fed will probably signal the path for interest rates based on “qualitative” judgments of the economy, moving away from a pledge to begin considering higher rates when unemployment falls below 6.5 percent.

Policy thresholds -- committing the Fed to record low rates so long as the outlook for inflation doesn’t exceed 2.5 percent and unemployment is 6.5 percent or higher -- “have been very useful” and “served their purpose” by anchoring interest-rate expectations when unemployment was “much higher,” Bullard said today on a panel in New York. He doesn’t vote on monetary policy this year.

The jobless rate unexpectedly declined in January to 6.6 percent, according to a Labor Department report, just above the Fed’s 6.5 percent threshold for considering an increase in the benchmark interest rate.

“We all knew the day would arrive when the unemployment rate would go through the threshold,” and the “natural thing to do” is to switch to more qualitative guidance, he said.

Fed Chair Janet Yellen made a similar point yesterday in testimony before the House Financial Services Committee in Washington, saying policy makers meeting in March “would be looking at a broad range of data on the labor market, including unemployment, job creation and many other indicators of labor market performance.”

Not Imminent

Policy makers have reinforced their assurances that interest-rate increases aren’t imminent by saying the main interest rate probably will stay low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” their 2 percent target.

“We have to go back to more traditional forms of policy where we have more qualitative judgments because we’re getting much closer to a more normal economy,” Bullard said.

At the Dec. 17-18 meeting of the Federal Open Market Committee, 12 of the 17 Fed officials who participated in the discussions didn’t see the central bank raising the main interest rate until next year.

Yellen in her testimony yesterday pledged to press on with her predecessor’s policy strategy by trimming stimulus in “measured steps,” and signaled the bar is high for changing that plan. Fed officials in December announced a $10 billion tapering in monthly asset purchases, and repeated the move last month with a cut of the same size to $65 billion.

Only a “notable change in the outlook” for the economy would prompt policy makers to slow the pace of tapering their bond buying, Yellen said.

Continue Tapering

Bullard reinforced that today in response to audience questions. “Right now I think we’re on track” to continue tapering asset purchases and “will be able to move out of the program later this year,” he said.

Speaking later in a Bloomberg Television interview, Bullard said that while the Fed is on a “good course” with measured reductions, it could adjust them in response to a major deterioration or improvement in economic reports.

“If we did adjust the pace of tapering in either direction it would be a very powerful signal,” Bullard said. “For that reason I think we want to be careful about using that tool, but we can use it if we have to, and reserve the right to take that up if the data come in either way, stronger or weaker.”

‘Constant Uncertainty’

Less wrangling over fiscal policy will boost the economy this year, reducing the “constant uncertainty” confronting businesses and consumers that “made people very nervous,” Bullard said.

“It’s a bullish factor for 2014 that we’ve got some kind of accord between Republicans and Democrats in Washington,” Bullard said. “To get that out of the equation is really the last piece of drag.”

Bullard said on the panel the faster growth of the second half of last year was “setting up for a good year” in 2014, and that he’s “still optimistic about prospects.” He said recent softer economic data hasn’t “deterred” his outlook and that he still expects growth of 3 percent or more.

Hiring rose by 113,000 last month, less than the 180,000 gain that was the median forecast of economists surveyed by Bloomberg, following a 75,000 increase in December.

Yellen, delivering her first public remarks as Fed chair yesterday, said financial-market turmoil doesn’t pose a major risk to the outlook for the U.S. economy and repeated the central bank’s statement that asset purchases aren’t on a “pre-set course.”

Longest Rally

The Standard & Poor’s 500 Index fell 0.1 percent to 1,818.90 at 12:15 p.m. in New York, while the yield on the 10-year Treasury note rose 0.03 percentage point to 2.76 percent.

Bullard said on the panel low inflation “remains a bit of a wild card and a bit of a puzzle for policy makers,” and predicted it will move toward the central bank’s goal.

The Fed, mandated by Congress to ensure stable prices, has fallen short of its 2 percent inflation target since April 2012. Prices rose 1.1 percent in the 12-month period ended in December, according to the personal consumption expenditures price index, the central bank’s preferred gauge.

“If it turns around and starts ticking up in 2014, I think we’ll be fine, but I think if we get further deterioration we’ll start asking questions,” Bullard said on the panel. If it does fall further, policy makers will be “prepared to take further action.”

Inflation Acceleration

Bullard said in the television interview that he expects inflation to accelerate toward 2 percent.

The St. Louis Fed chief said he doesn’t “see any large-magnitude asset bubbles today” similar to the excessive prices in housing or Internet stocks in prior decades.

Still, the Fed’s unprecedented accommodation has left “a fertile environment for the creation of asset bubbles in the future,” Bullard said to reporters. “I would start to put more weight now on that as a risk.”

Recent turmoil in emerging markets probably won’t harm the U.S., he said.

“Janet Yellen had it right in her testimony yesterday,” Bullard said. “We don’t see the developments in the emerging markets feeding back to the U.S. -- at least as of now.”

The MSCI Emerging Markets Index has fallen 5 percent this year. The gauge of shares in 21 nations rose 0.8 percent today.

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