Sun, Mar 23, 2014 page13

• St Louis Fed backs Yellen outlook

  • Bloomberg
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  Federal Reserve Bank of St Louis President James Bullard defended US Federal Reserve Chair Janet Yellen’s comments on interest-rate increases, saying her outlook is in line with private surveys on when the central bank might start tightening policy.

  US Treasury bond yields jumped on Wednesday after Yellen said in her first press conference as Fed chair that rates could rise “around six months” after asset purchases end, most likely in the fall.

  Bullard, speaking in Washington on Friday, said “the surveys that I had seen from the private sector had that kind of number penciled in, as far as I knew.”

  “That wasn’t very different from what we had heard from financial markets, so I think she’s just repeating that at that time period,” Bullard said at a roundtable at the Brookings Institution.

  Bullard does not vote on policy this year.

  Bullard’s comments suggest “he might be pushing back” to counter the view in the markets that the Fed might raise interest rates sooner than expected, New York-based Societe Generale SA chief US economist Aneta Markowska said.

  “They didn’t intend to change anything in terms of the market’s timing of the liftoff,” she said. “That wasn’t their intent and I think that’s what he’s trying to get across. The intention was just to reaffirm what they believed the market expectation was at the time.”

  The Fed this week announced its third-straight US$10 billion reduction in the monthly pace of asset purchases, to US$55 billion.

  Dallas Fed President Richard Fisher, who is a voting member of the policy-setting US Federal Open Market Committee (FOMC), said in a speech in London that the timetable makes it “pretty clear by October, if we continue at this pace, that our large-scale asset purchases will be terminated.”

  He said market reaction to the policy outlined this week suggests some found it “disagreeable even if it is sound.”

  The FOMC this week said it will look at a “wide range of information” in deciding when to raise its benchmark interest rate, dropping guidance tying borrowing costs to a 6.5 percent unemployment rate. The central bank also released new economic projections, which showed that officials expected higher interest rates by the end of next year and 2016 compared with estimates released in December last year.

  Fisher suggested investors were placing too much emphasis on the change in forecasts, which the Fed illustrates as dots plotted on a chart.

  There is a “fixation, if not a fetish, on the dots,” he said at the London School of Economics.

  The change in forecasts by Fed officials came before this week’s meeting, he said.

  “Somehow, this was read as a massive shift,” Fisher said. “These are our best guesses.”

  Fisher also said the Fed may consider boosting the interest it pays on excess bank reserves to control short-term interest rates after it winds down asset purchases.

  “It is a tool we can use particularly in the exit side once we start, which I believe is quite out there in the future, moving the short-term base rate,” he said. “I am not going to put a time frame on it because it will be quite some time after we stop” large-scale asset purchases.

  Minneapolis Fed President Narayana Kocherlakota was the only policymaker to dissent from Wednesday’s statement.

  Kocherlakota on Friday said that the omission of quantitative benchmarks for policy fosters uncertainty and undercuts the Fed’s commitment to bring inflation back toward its 2 percent target.

  An index of inflation watched by the Fed rose 1.2 percent from a year earlier in January and has not exceeded 2 percent since March 2012.
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