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.
“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 QE 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 so-called quantitative easing, saying any change should depend on whether inflation moves toward the Fed’s 2% target. Policy shouldn’t rely on central bank forecasts for the economy that have proven 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.”
Bullard dissented from the FOMC’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 following meeting when the FOMC added language saying persistently low inflation posed risks to the economic outlook.
“I think 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 entitled “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.