Base QE taper on data since September: Stein


Sun, Jun 30, 2013 - Page 13

US Federal Reserve Governor Jeremy Stein, who has backed record stimulus, said officials considering when to start reducing the pace of asset purchases should evaluate economic data since the program began in September last year, rather than looking only at the most recent figures.

The Federal Open Market Committee should “be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting — as salient as these releases may appear to be to market participants,” Stein said on Friday in New York.

“Economic fundamentals” have improved since the Fed’s third round of asset purchases began in September last year, Stein said.

The unemployment rate has fallen to 7.6 percent from 8.1 percent, and the average monthly pace of payroll gains has risen to 194,000 in the past six months, compared with 97,000 over the six months before the bond buying started.

“He’s not saying explicitly we’re going to taper,” New York-based Miller Tabak and Co chief economic strategist Andrew Wilkinson said. “If we get firm reports, and 175,000 jobs a month would be relatively firm, I don’t think it would do any harm to start in September. The process is dependent on the data rather than the calendar.”

The Fed has said it will maintain asset purchases until the labor market has “improved substantially,” without defining that term.

At the June 19 press conference, US Federal Reserve Chairman Ben Bernanke said he expects the jobless rate to be about 7 percent when the Fed halts asset purchases.

Stein, in Friday’s remarks to the Council on Foreign Relations, said the 7 percent figure did not represent a change in policy.

Rather, it is “an effort to put more specificity around the heretofore less well-defined notion of ‘substantial progress,’” Stein said.

Since Bernanke’s June 19 news conference, policymakers have emphasized that they intend to provide stimulus long after ending monthly bond purchases.

At the start of the current round of purchases in September last year — with the most recent government report putting unemployment at 8.1 percent — the Fed could not be sure how far it would need to expand its balance sheet to reach its goals, Stein said.

“As we get closer to our goals, the balance sheet uncertainty becomes more manageable — at the same time that the market’s demand for specificity goes up,” Stein said.

The falling unemployment rate needs to be driven by an improving economy, and not by people dropping out of the labor force, Stein said in response to audience questions.

A report next week from the Labor Department may show that the unemployment rate fell to 7.5 percent this month from 7.6 percent last month, according to the median forecast in a Bloomberg survey of economists. Employers probably added 165,000 workers to payrolls, down from 175,000 the prior month.

Economic growth is on the verge of picking up as “a lot of the headwinds we saw before — Europe and others — have dissipated” and fiscal restraint recedes, Stein said.