Bloomberg News

Fed Regional Chiefs Differ Over Easing Neeed to Lift Jobs

February 21, 2013

Two Federal Reserve regional bank presidents differed over the Fed’s future progress in cutting 7.9 percent unemployment, highlighting a division among policy makers over whether to slow the pace of record stimulus.

The jobless rate won’t fall below 6.5 percent until the second half of 2015, underscoring the need for “powerful and continuing monetary accommodation,” San Francisco Fed President John Williams said today. St. Louis’s James Bullard predicted the rate will hit that level by June 2014 and said bond purchases could be reduced as the economy improves.

The FOMC has pledged to keep the main interest rate near zero as long as joblessness is above 6.5 percent and inflation is projected to be no more than 2.5 percent. The panel hasn’t specified an end-date for its program of $85 billion in monthly asset purchases, saying only that it will continue until the labor market improves “substantially.”

Fed officials are debating whether the benefits to the economy from bond buying exceed the risks the unorthodox easing will create asset-price bubbles or fuel inflation. Several said the Federal Open Market Committee should be prepared to adjust the pace of monthly asset purchases, as Bullard has suggested, according to minutes of the Jan. 29-30 FOMC meeting released yesterday.

“As labor markets improve somewhat, the pace of asset purchases could be reduced somewhat, but not ended altogether,” Bullard said today in New York. He said the level of purchases could be adjusted in increments of $10 billion to $15 billion a month.

The unemployment rate will probably continue to fall by about 0.7 percentage point per year, said Bullard, who holds a vote on monetary policy this year.

Substantial Improvement

A number of Fed officials said the costs of stimulus may warrant reducing or ending the bond-buying program before the labor market substantially improves, according to minutes of the January gathering. “Several others” noted the risks of pulling back the stimulus too soon, the record said.

Stocks declined for a second day today as concern grew the Fed may slow the pace of bond purchases. The Standard & Poor’s 500 Index (SPX) fell 0.6 percent to 1,502.42 in New York, while the yield on the 10-year Treasury note slid two basis points, or 0.02 percentage point, to 1.98 percent.

Williams, who doesn’t vote on the FOMC this year, said he expects the economy to grow 2.75 percent in 2013 and 3.25 percent in 2014. Treasury and mortgage-bond purchases will be needed “well into” the second half of this year, he said, adding that the Fed could begin tapering the program if the economy grows faster than he anticipates.

Signal Stop

“I wouldn’t want the beginning of tapering to be a signal of stopping,” he said to reporters after his speech.

Despite the “lackluster” job market, the San Francisco Fed official gave no indication he wants to accelerate the pace of the purchases.

There’s an “asymmetry” to increasing the pace because there are “some more increasing costs,” and concerns about “market disruption” if the Fed were to do so, he said.

Dallas Fed President Richard Fisher has endorsed the idea of “tapering” asset purchases before halting the stimulus to avert a potentially disruptive “cold turkey” end in the buying. The central bank has expanded its balance sheet to a record exceeding $3 trillion.

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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