By Steven K. Beckner
(MNI) – St. Louis Federal Reserve Bank President James Bullard said
Thursday that the Fed should “continue to pause” in its monetary easing
campaign given the economy’s improved performance and outlook.
Further easing would leave the Fed “overcommitted” to an already
“ultra-easy monetary policy,” said Bullard, who advised a “wait and see”
approach.
Bullard said the Fed’s policymaking Federal Open Market Committee
is sending an “unwarranted pessimistic signal” with its conditional
committment to keeping the federal funds rate near zero “at least
through late 2014.”
And he questioned the credibility and, hence, impact of that
language, suggesting that if the economy continues to improve the FOMC
will inevitably raise the funds rate sooner.
Since the extended zero funds rate does little to reduce
unemployment while hurting savers, it would be better to focus on labor
market policies than on further monetary stimulus, he said in remarks
prepared for delivery at the 13th Annual InvestMidwest Venture Capital
Forum in St. Louis.
“Incoming data have generally indicated somewhat
better-than-expected macroeconomic performance so far this year,” said
Bullard, whose remarks were similar to those delivered on March 23.
He added that, with the European debt crisis having eased, “the
outlook has improved” since last Fall.
“Past behavior of the Committee suggests a ‘wait-and-see’ strategy
at this juncture,” he said, warning that “as the U.S. economy continues
to rebound and repair, additional policy actions may create an
over-commitment to ultra-easy monetary policy.”
And so Bullard, who is not an FOMC voter this year, said “an
appropriate approach at this juncture may be to continue to pause to
assess developments in the economy.”
As he has before, Bullard threw doubt on the efficacy of the FOMC’s
principal communications tool — the “late 2014″ language on the
expected period of zero rates.
Theoretically, pre-announcing how long the key money market rate is
to be held down “can influence financial market conditions and provide
further monetary accommodation,” he said, but in practice he said there
are “some important caveats for actual policy application.”
For one thing, “it is not clear how credible actual announcements
can be,” he said. “If the economy is performing well at the point in the
future where the promise begins to bite, then the Committee may simply
abandon the promise and return to normal policy.”
“But this behavior, if understood by markets, cancels out the
initial effects of the promise, and so nothing is accomplished by making
the initial promise,” said Bullard. “A non-credible announcement would
be unhelpful.”
What’s more, “besides being ineffective, there is an important
downside,” he said.
“The 2014 language in effect names a date far in the future at
which macroeconomic conditions are still expected to be exceptionally
poor,” he said, but “neither the Fed nor any other forecaster has a
clear idea of what macroeconomic conditions will be like at that time.”
Bullard said “this is an unwarranted pessimistic signal for the
FOMC to send.”
Bullard also repeated past contentions that the “output gap” — the
difference between actual and potential GDP growth — is not as large as
others think and said the recent rise in inflation proves it.
The Fed should not be measuring the output gap relative to the
economy’s pre-crisis peak because it was experiencing a housing bubble,
which is neither feasible nor desirable to reflate, he argued.
Besides, he said, “monetary policy is a blunt instrument which
affects the decision-making of everyone in the economy.”
“In particular, savers are hurt by low interest rates,” said
Bullard, adding, “it may be better to focus on labor market policies to
directly address unemployment instead of taking further risks with
monetary policy.”
He concluded that “U.S monetary policy is on pause and may remain
so in order to assess whether recent improvements in the U.S. economy
continue.”
** MNI Washington Bureau: 202-371-2121 **
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