Federal Reserve Bank of St. Louis President James Bullard said gains in the labor market since September 2012 could warrant a cut in the Fed’s $85 billion in monthly bond purchases.
“This provides the most powerful part of the case for tapering,” Bullard said today in St. Louis. “Two key labor market indicators have shown clear improvement over the last year: Unemployment and nonfarm payroll employment.”
Bullard backed the Federal Open Market Committee decision this week to press on with bond buying while awaiting more evidence the economy has gained strength following a U.S. government shutdown last month. The shutdown reduced growth by 0.3 percentage point this quarter, according to the median estimate in an Oct. 17-18 Bloomberg survey.
The FOMC removed from its statement a reference to tightening financial conditions, which was one reason officials chose in September not to slow the pace of bond purchases.
“To the extent that key labor market indicators continue to show cumulative improvement, the likelihood of tapering asset purchases will continue to rise,” Bullard said in remarks prepared for a speech to the St. Louis Regional Chamber’s Financial Forum. “This is because the committee’s 2012 criterion of substantial improvement in labor markets gets easier and easier to satisfy on a cumulative basis as labor markets continue to heal.”
Still, Bullard said the FOMC wants reassurance progress in labor markets “will stick.”
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 percent target. Policy shouldn’t rely on central bank forecasts for the economy that have proven too optimistic in the past three years, he has said.
Bullard today described the outlook for tapering as “data dependent”
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.