Fed’s Bullard says balance-sheet growth lifts exit concern

Federal Reserve Bank of St. Louis President James Bullard said central bank stimulus has been ramped up this year with the decision to increase outright bond purchases to $85 billion a month and that a growing balance sheet could be complicated to unwind.

“The current stance of U.S. monetary policy is considerably easier than it was in 2012,” Bullard said in a speech prepared for delivery today in Starkville, Mississippi. “The size of the balance sheet could inhibit” the Fed’s “ability to exit appropriately from the current very expansive monetary policy.”

Bullard, who votes on policy this year, yesterday predicted U.S. growth will accelerate to 3.2% in 2013, a pace he said would allow the Federal Open Market Committee to consider slowing its bond buying after this spring from a rate of $85 billion a month. Policy makers have pushed the benchmark interest rate close to zero and expanded Fed assets to a record exceeding $3 trillion to fuel growth and reduce 7.9% unemployment.

“As labor markets improve somewhat, the pace of asset purchases could be reduced somewhat, but not ended altogether,” Bullard said at Mississippi State University. “Without an end date, the Committee may have to alter the pace of purchases as news arrives concerning U.S. macroeconomic performance.”

Asset Purchases

Bullard told his audience that asset purchases could be reduced to “$75 billion or $65 billion” in response to improved data.

The St. Louis Fed leader told reporters after his speech the central bank could consider a formula to guide a slowing of asset purchases, for example, reducing monthly purchases by $15 billion for each tenth of a percentage point drop in unemployment.

“Something like that I think would be reasonable” though the committee hasn’t backed any kind of formulaic approach, he said. “I’m very cognizant we are not in that position right now.”

One challenge with a reduction in stimulus is that record profits that the Fed has turned over to the U.S. Treasury may disappear as the central bank shrinks its balance sheet and interest rates rise, Bullard said.

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