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Bullard Says Fed on Hold Until Late ‘11 With ‘Softer’ Data

Wednesday, 18 May 2011 04:40 PM

Federal Reserve Bank of St. Louis President James Bullard said the central bank may keep its monetary-policy unchanged until late this year, and that declining inflation expectations have curbed the need to begin withdrawing record stimulus.

“It does take some pressure off the Fed,” Bullard said in an interview at Bloomberg News headquarters in New York. “I take it seriously that market indicators of inflation have come down. The data has been softer, and these global uncertainties have weighed on markets.”

Fed officials are discussing how quickly to begin tightening policy after completing the purchase of $600 billion in U.S. Treasurys by the end of June. They are also discussing a strategy for the exit, with a majority favoring ending the policy of reinvesting proceeds from maturing securities first before raising interest rates or selling assets, minutes of their April 26-27 meeting showed today.

“We will get some more data through the summer, have some meetings in the fall and by that time we will have more information of how things are moving along,” he said to response to a question on how long the Fed would “hold” policy after June.

Policy makers have differed in public comments on the timing of an exit. Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said this month he favors raising the target interest rate this year, while Philadelphia’s Charles Plosser urged a pull-back in the “not-too-distant future.” New York Fed President William C. Dudley said the recovery hasn’t met the central bank’s goals.

Key Indicator

Bullard said he sees Treasury securities as a key indicator of the public’s views on inflation. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, shrank to as low as 2.26 percentage points today from 2.67 points April 11.

Bullard said his and other Fed members’ forecasts for as much as 4 percent growth over the remainder of this year are more optimistic than most private forecasts, and the central bank would be slower to tighten policy if Fed forecasts aren’t met. Growth will be 2.7 percent for the year, according to the median of 66 economists surveyed this month by Bloomberg News.

“We need to see a bit stronger data,” he said. “If we don’t, we are going to have to mark down a little bit.”

“If it is a little weaker, you could stay on hold longer,” Bullard said. “If it is stronger, you could take a move toward a tighter policy sooner.”

Change From July

Bullard’s concern this year over inflation represents a change from last July, when he urged purchases of Treasurys to head off the risk deflation. He was the first Fed official to support a second round of so-called quantitative easing. Policy makers in November approved the asset purchase plan.

The St. Louis Fed president said any tightening campaign should begin by shrinking the Fed’s balance sheet, which could be done “passively” by not reinvesting maturing mortgage-backed securities or by outright asset sales.

“Allowing the runoff to occur seems to be a likely first step,” he said. “Whether you would supplement that with actual sales is controversial and undecided at this point.” Interest rate changes would represent “bringing out the big guns” and likely come later, he said.

“If you could get away with it, it would make sense to shrink the balance sheet a fair amount and then come with interest rate increases,” he said.

Balance Sheet

Asked how long it would take to return the Fed to a normal balance sheet, Bullard said “five years is a reasonable number.” Many participants in the April Federal Open Market Committee Meeting agreed with that timetable, according to today’s minutes.

“Obviously we would not dump a lot on the market at any one time,” he said. “You would sell in a controlled way.”

Bullard said signs of job growth are among the reasons he’s more optimistic than many economists. The Labor Department said May 6 the economy added 244,000 jobs in April with non- government employers adding 268,000, the most since 2006. Other job-market data remain weak, as the unemployment rate has been stuck near 9 percent or higher for 25 months.

The U.S. central bank should move ahead with a formal inflation target now because of rising doubts in “parts of financial markets” about its commitment to stem price gains.

“I and many others are determined to get this done,” he said. “It is the best of times to make a decision on this.”

Rate Outlook

The Fed is likely to raise its target fed funds rate by a quarter point in the first quarter of 2012, according to the median of 68 economists surveyed by Bloomberg this month. The rate has been near zero since December 2008, and since March 2009 the Fed has pledged to keep it “exceptionally low” for an “extended period.”

The economy grew at a 1.8 percent pace in the first quarter of 2011, according to Commerce Department data.

Bullard, 50, has rotated this year into an annual non- voting position. He joined the St. Louis Fed’s research department in 1990 and became president of the bank in 2008.

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Federal Reserve Bank of St. Louis President James Bullard said the central bank may keep its monetary-policy unchanged until late this year, and that declining inflation expectations have curbed the need to begin withdrawing record stimulus. It does take some pressure off...
Wednesday, 18 May 2011 04:40 PM
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