Bloomberg News

Tarullo Says Any QE Tapering Would Depend on Economic Gains (2)

July 15, 2013

Federal Reserve Governor Daniel Tarullo, who has always voted in favor of bond purchases by the Fed, said the central bank’s plan to taper its $85 billion in monthly bond buying hinges on gains in the economy as it moves further into a period of fiscal restraint.

Changes in the monthly amount of purchases are “data driven, dependent on the economy, as we see the economy develop then we will make our judgment,” the Fed governor said today in Washington. “We are not specifying no matter what happens on this particular date we are going to have a change in the flow. It will still be a very accommodating policy.”

“No one is talking about selling the securities we’ve been buying,” Tarullo, 60, said at a briefing hosted by Politico.

Fed Chairman Ben S. Bernanke said last month the Federal Open Market Committee may begin reducing its bond buying “later this year” and halt the program around mid-2014 if the economy performs in line with central bank forecasts. The 59-year-old Fed chairman may provide more details on the plan in his semi-annual testimony to the House of Representatives and Senate on July 17-18.

U.S. central bankers last month forecast the economy would grow between 2.3 percent and 2.6 percent this year and as much as 3 percent to 3.5 percent in 2014, according to central tendency estimates. They forecast the unemployment rate would average 7.2 percent to 7.3 percent in the fourth quarter of this year and 6.5 percent to 6.8 percent in the final three months of next year.

Reducing Debt

The jobless rate stood at 7.6 percent in June. Tarullo said households and businesses have made progress reducing debt, mitigating one headwind to economic growth. The question is to what extent fiscal restraint will slow growth and hiring, he said.

“It is undeniable that those fiscal effects have had a drag and a significant one,” he said. “But for all of us the question is going to be: Can the economy with such underlying momentum as it built up work through the peak period of fiscal constraint” likely to hit in the second and third quarters?

“That’s the question that I am going to be asking myself as we come up into the next several FOMC meetings,” said Tarullo, who as a governor has a permanent vote on monetary policy.

“What does the data say about whether that underlying momentum is enough to sustain positive growth through this period?” he said.

Financial Crisis

Tarullo also said U.S. regulators should focus on protections around banks’ short-term wholesale funding as they finish implementing reforms prompted by the financial crisis.

“The big area I think we need to do more on is short-term funding,” he said. Letting a bank lean heavily on transactions such as repurchase agreements could “make the institution and the system susceptible to runs” of the kind that toppled Bear Stearns Cos. and Lehman Brothers Holdings Inc.

Fixing that vulnerability, which banks still face, is a more important goal for protecting the financial system than reinstituting the separation between commercial and investment banking, he said.

The FOMC has tied the benchmark lending rate, which has been near zero since December 2008, to indicators for employment and prices. The committee has said it will consider raising the main interest rate should unemployment decline to 6.5 percent or the long-term inflation forecast exceed 2.5 percent.

Reaching one of those thresholds will be a moment for a committee to “sit and think” and consider a broad range of data, he said. There are many contingencies that could keep the policy rate low even if the thresholds are hit, he said.

‘Still Subdued’

“Inflation might still be subdued,” Tarullo said. “We might see there is a good bit of slack in the labor market, perhaps labor force participation has still not bounced back,” he said, adding there are good reasons to believe it will.

The Standard & Poor’s 500 Index rose 0.2 percent to 1,682.82 at 12:08 p.m. in New York, while the yield on the 10-year Treasury note fell two basis points to 2.56 percent.

Tarullo is the Fed governor in charge of supervision and regulation at the Board of Governors.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net

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


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