Federal Reserve Bank of St. Louis President James Bullard said U.S. unemployment may drop to 6.5% by the middle of next year and prompt the central bank to raise its benchmark interest rate from near zero.
“The current St. Louis Fed forecast for the unemployment rate implies that the 6.5% threshold will be crossed in June 2014,” Bullard said today in New York. The Fed last month renewed its pledge to keep borrowing costs low “at least as long” as joblessness exceeds 6.5% and if projected inflation won’t go beyond 2.5% one or two years in the future.
Bullard today repeated his proposal to adjust the Fed’s $85 billion in monthly bond buying to account for changes in the economic outlook. Fed Chairman Ben S. Bernanke has said the Fed will keep buying bonds until there’s a “substantial” improvement in the labor market, and the Fed hasn’t specified a date for the end of purchases.
“Without an end date, the committee may have to alter the pace of purchases as news arrives concerning U.S. macroeconomic performance,” Bullard said today to the Center for Global Economy and Business at New York University’s Stern School of Business.
The Federal Open Market Committee on Jan. 29-30 debated Bullard’s proposal, according to minutes of the meeting released yesterday. Several participants “emphasized that the committee should be prepared to vary the pace of asset purchases,” the minutes showed.
Dallas Fed President Richard Fisher has also endorsed the idea of “tapering” asset purchases before halting the stimulus to avert a potentially disruptive “cold turkey” end in the buying. The central bank, seeking to stoke growth and bring down 7.9% unemployment, has expanded its balance sheet to a record exceeding $3 trillion.
In response to audience questions, Bullard said the outlook for the U.S. economy has become more favorable partly because of an easing in Europe’s debt crisis, which cut growth last year.
At the same time, the U.S. economy’s potential for growth may have declined from its rate before the 2008 financial crisis, he said.
The FOMC’s achievement of “substantial” gains in the job market will occur gradually, the St. Louis Fed leader said.
“This suggests that as labor markets improve somewhat, the pace of asset purchases could be reduced somewhat, but not ended altogether,” Bullard said.
Bullard is willing to alter monthly purchases by $10 billion to $15 billion depending on shifts in the economic outlook, he said to reporters after his speech.
The Standard & Poor’s 500 Index fell 0.9% to 1,498.15 at 2:18 p.m. in New York. The yield on the 10-year Treasury note declined four basis points, or 0.04 percentage point, to 1.96%.
The St. Louis Fed chief said he sees weaknesses in the use of unemployment as a threshold for an interest rate change.
“The use of thresholds is not a panacea,” he said in his speech. “The FOMC cannot pretend to target medium- or long-term unemployment.”
Also, “the Committee needs to reiterate that it considers many more variables in attempting to gauge the state of the U.S. economy” and that hitting the thresholds for employment or inflation shouldn’t be viewed as a trigger for policy action.
Bullard didn’t comment on recent economic reports in his presentation.
Initial claims for unemployment benefits rose for the first time in three weeks by 20,000 to 362,000 in the week ended Feb. 16, the Labor Department reported today. A separate report showed the Consumer Price Index was little changed. Over the past 12 months it has risen 1.6%, the smallest year-over-year gain since July.
Bullard, 51, backed the FOMC decision last month to continue monthly securities purchases after the economy shrank 0.1% during the fourth quarter. The Fed in December 2008 cut the main interest rate close to zero to bring down borrowing costs and fuel economic growth.
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.