Federal Reserve Bank of St. Louis President James Bullard, who votes on policy this year, said the odds of tapering bond purchases have risen along with gains in the labor market, and any reduction should be modest to account for low inflation.
“A small taper might recognize labor-market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014,” Bullard, a supporter of record stimulus, said today in St. Louis. “Should inflation not return toward target, the committee could pause tapering at subsequent meetings.”
With the U.S. labor market showing signs of strengthening, the Federal Open Market Committee may start dialing down $85 billion in monthly bond buying at a Dec. 17-18 meeting rather than wait until January or March, according to 34% of economists in a Dec. 6 Bloomberg News survey. In a poll last month, 17% of economists predicted a December tapering.
“Based on labor-market data alone, the probability of a reduction in the pace of asset purchases has increased,” Bullard said in the text of remarks to the CFA Society of St. Louis.
“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. “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.”
U.S. employers added more workers than forecast last month, and the jobless rate fell to a five-year low of 7%, the Labor Department said last week. The FOMC has pledged to press on with bond buying until the outlook for the job market has “improved substantially.”
Bullard, noting inflation is well below the Fed’s target, has in the past urged the Fed to hold off on reducing its asset purchases or raising interest rates. Instead, he has proposed that the Fed pledge not to raise the benchmark interest rate if inflation is below 1.5%.
The St. Louis Fed official reiterated his concern about weak inflation.
“There is no widely accepted reason why inflation is running as low as it is in the face of extraordinarily accommodative policy from the Fed,” he said.
The Fed’s preferred measure of inflation, the personal consumption expenditures index, showed prices rising 0.7% in the 12 months ended in October.
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.