Mon, Jan 09, 2012 - Page 10 News List

Fed official says bond buying unlikely

MOMENTUM:The St Louis Fed president said recent data on the US economy has been ‘very strong’ and the central bank could now take a ‘wait and see’ approach

Bloomberg

US Federal Reserve Bank of St Louis President James Bullard said the Fed probably would not begin a new round of bond purchases following “encouraging” data showing the US economy gained 200,000 payroll jobs last month.

“Hopefully, we will keep this momentum going in 2012,” Bullard told reporters on Saturday after a speech in Chicago.

“The tone of the data has been very strong” and the central bank “probably could wait and see for now” before deciding whether there is a need for more accommodation, he added.

Policymakers are divided over whether they should see if the economy deteriorates before taking additional steps to try cutting borrowing costs and boosting job creation.

The US economy is growing moderately amid “apparent slowing” in global growth, with “some improvement in overall labor market conditions,” Fed officials said last month.

The unemployment rate fell to 8.5 percent from 8.7 percent in November, figures from the US Labor Department showed last week.

“The jobs report was encouraging and I’m hopeful that this is a harbinger of more robust activity” in the US economy, Bullard said.

A third round of quantitative easing is not “very likely right now,” and officials need to weigh the benefits and the costs of such a move.

In addition, forecasters have been “a bit too pessimistic about the US economy,” Bullard said after speaking to the Korea-America Economic Association.

“The best forecast is the momentum will continue,” he said.

The US Federal Open Market Committee plans to start releasing officials’ forecasts for borrowing costs after its Jan. 24 to Jan. 25 meeting, according to minutes of the Dec. 13 gathering released last week. That might boost economic growth by delaying expectations for an increase in the benchmark rate from near zero, said economists at JPMorgan Chase & Co and Mesirow Financial Inc.

Bullard said he sees reason for skepticism toward the committee’s decision to release officials’ forecasts for the benchmark rate.

“It is unclear to me if putting out 17 forecasts is the best way to do it,” Bullard said. “We will have ample opportunity to experiment” with this.

Still, “there are legitimate questions” on whether this is the best path, he added.

The committee also has made “considerable progress” on an inflation target, without reaching a final decision, Bullard told reporters.

Bullard, 50, who does not vote on monetary policy this year, was the first Fed official in 2010 to call for a second round of asset purchases. He published a paper in 2010 entitled Seven Faces of “The Peril”, which called on the Fed to avert deflation by purchasing US Treasury notes, a policy known as quantitative easing.

His speech on Saturday was based on a paper set to be released this month, titled Death of a Theory. In it, the bank president says monetary policy works better than tax and spending changes in protecting the economy from shocks, even with the target for the overnight lending rate between banks close to zero since December 2008.

“Stabilization policy should be left to the monetary authority, which can operate effectively” with the fed funds rate at almost zero, Bullard said.

By contrast, the use of tax and spending changes to respond to shocks over the short run “has run its course.”

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.

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