Federal Reserve Bank of St. Louis President James Bullard, a voter on Fed policy this year who has backed record stimulus, said a small tapering of bond buying is possible next month after the Fed’s Open Market Committee made a close call this week in deciding not to slow purchases.
“That was a borderline decision” after “weaker data came in,” Bullard said Friday on a Bloomberg Television program. “The committee came down on the side of, ‘Let’s wait.’”
Bullard called October a “live meeting,” because “it’s possible you could get some data that change the complexion of the outlook and could make the committee be comfortable with a small taper in October.”
The Fed this week unexpectedly refrained from reducing its $85 billion in monthly asset purchases, saying it needs to see more signs of sustained labor market gains. Chairman Ben Bernanke said Wednesday that the central bank would decide whether to taper purchases based on “what’s needed for the economy.”
The Fed will be able to consider the September jobs report and revisions of prior months as well as updated housing reports at its Oct.29-30 meeting, Bullard said in a separate interview at Bloomberg’s headquarters in New York. “This was a very close call, so maybe the information would come in in a way that would change the complexion” of the outlook, he said.
Markets shouldn’t have been surprised by the decision because Federal Open Market Committee members have repeatedly said the decision to slow, or taper, would be “data dependent,” Bullard said.
“I’m a little dismayed at those in markets that are saying they’re surprised by this,” Bullard said. The Fed said that, “if the economy was going to improve in the second half of the year, and if we saw that improvement, we would taper.”
Bernanke’s remarks earlier this year on the prospect for tapering sent bond yields as much as a percentage point higher.
Yields on the benchmark 10-year Treasury note climbed as high as 2.99 percent on Sept. 5 from 1.93 percent on May 21, the day before Bernanke first outlined a possible timetable for a reduction in the asset purchases.
This week’s decision by the Fed not to taper helped reverse that rise and pushed back expectations for a tightening of monetary policy.
“[Interest] rates went up a lot over the summer,” and “for many on the committee that was a surprise,” Bullard said. It wasn’t a “surprise for me because I’ve said the flow of [quantitative easing] matters a lot.”
So “when we threatened to pull that back, markets naturally” sent yields higher, he said.
Bullard during the past two months has urged the Fed to hold off on adjusting the so-called quantitative easing, saying any change should depend on whether inflation moves toward the Fed’s 2 percent target.
Policy shouldn’t rely on central bank forecasts for the economy that have proved too optimistic in the past three years, he said.
“We got some weaker data, so that put the committee in a position where we could delay,” he said. With inflation low, Bullard said, “we can afford to be patient.”
The Federal Open Market Committee might also want to adjust its guidance on rates, Bullard said. A “more likely” scenario than changing the 6.5 percent unemployment threshold is introducing an inflation floor, Bullard said.
The threshold would be something like “so long as inflation was running below 1.5 percent,” the Fed wouldn’t raise interest rates, he said.
Bullard said he thought 1.5 percent was a good level because it’s “symmetric” with the 2.5 percent threshold on the “high side” of the central bank’s 2 percent goal for price increases. Bullard said he doesn’t see the Fed changing its unemployment threshold.
“I don’t think that’s going to happen,” he said. “If you move that threshold,” it “loses meaning” as “markets would rightly think” the Fed could move them around “for convenience.”
The Fed’s preferred measure of inflation, the personal consumption expenditures index, showed prices rising 1.4 percent in the 12 months that ended in July.
Bullard dissented from the Open Market Committee’s June 19 policy statement, saying the panel should “signal more strongly its willingness to defend its inflation goal.”
He dropped the dissent at the next meeting when the committee added language saying persistently low inflation posed risks to the economic outlook.
Bullard said he disagreed with the committee indicating a plan to taper bond buying at that point, including stopping purchases in the middle of next year.
“It was premature to lay out the road map” for tapering in June, Bullard said. “I do think it was a mistake.”
“We should defend our inflation target from the low side,” Bullard said.
Bernanke has orchestrated the most aggressive easing in the Fed’s 100-year history, pumping up the balance sheet to $3.72 trillion from $867 billion in August 2007 and holding the main interest rate close to zero since December 2008.
Bullard, who calls himself the “North Pole of inflation hawks,” has been viewed as a bellwether for investors because his views have sometimes foreshadowed policy changes.
He published a paper in 2010 titled “Seven Faces of the Peril,” which called on the central bank to avert deflation by purchasing Treasury notes.
That was followed by a second round of bond buying.
Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008.
His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
Business, Pages 31 on 09/21/2013