Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, said the decision not to slow bond buying was a close call and “small” tapering is possible next month.
“That was a borderline decision” after “weaker data came in,” Bullard said today on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene. “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 S. Bernanke said Sept. 18 the central bank would decide on whether to taper purchases based on “what’s needed for the economy.”
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% on Sept. 5 from 1.93% on May 21, the day before Bernanke first outlined a possible timetable for a reduction in the asset purchases.
This week’s FOMC decision not to taper helped reverse that rise and pushed back expectations for a tightening of monetary policy. Yields on the benchmark 10-year Treasury note rose one basis point to 2.76% as of 8:08 a.m. in New York, according to Bloomberg Bond Trader prices.
Investors see a 43% chance policy makers will increase the federal funds rate target to 0.5% or more by January 2015, based on data compiled by Bloomberg from futures contracts. The odds were 68% two weeks ago.