Federal Reserve Bank of St. Louis President James Bullard said it may be difficult to tie the central bank’s $85 billion monthly bond purchases to numerical levels of unemployment and inflation.
After settling a debate over how long to hold interest rates near zero, Fed officials are debating when to halt their purchases of Treasurys and mortgage-backed securities. At its December meeting, the Federal Open Market Committee agreed to hold the target interest rate near zero so long as unemployment remains above 6.5 percent and inflation stays below 2.5 percent.
“Attempts to also put thresholds on the timing of asset purchases may be a bridge too far,” Bullard told the Wisconsin Bankers Association in Madison, Wisconsin, according to prepared materials from the St. Louis Fed.
Bullard said last week that unemployment could drop to about 7 percent by the end of this year, which may be enough improvement for the FOMC to halt the purchases, known as QE3 for the third round of quantitative easing.
“With QE3, the Committee instead seeks ‘substantial improvement’ in labor markets before pausing purchases,” Bullard said. “The Committee may also taper the program as needed.”
The central bank began purchasing $40 billion a month of mortgage debt in September and announced purchases of $45 billion a month of Treasurys at their December meeting. If the program continues until year-end, purchases would total around $1 trillion and the Fed’s balance sheet would approach $4 trillion.
Minutes of the Fed’s December meeting show a split among policy makers over how soon the program should end. “Several” members of the FOMC said it would “probably be appropriate to slow or stop purchases well before the end of 2013,” according to the minutes. A “few” were willing to let the program run to the end of the year while “a few others” didn’t give a time frame.
Bullard said the Fed will “have to make a judgment concerning the program as macroeconomic data arrive.”
The St. Louis Fed chief forecast the economy could grow 3.2 percent in 2013 and 2014 as inflation will remain near the Fed’s 2 percent goal. That’s more optimistic than the median estimate in a Bloomberg Survey of 96 analysts, showing growth of 2 percent in 2013 and 2.8 percent in 2014.
Fed presidents rotate voting on monetary policy, with Bullard scheduled to join the committee at the FOMC’s January 29-30 meeting. Also joining the committee are Chicago’s Charles Evans, who led the campaign to link interest rates to economic conditions, Boston’s Eric Rosengren and Kansas City’s Esther George.
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