By Steven K. Beckner and Claudia Hirsch
NEW YORK (MNI) – St. Louis Federal Reserve Bank President James
Bullard said Thursday that the Fed’s oft-repeated “extended period” of
“exceptionally low” interest rates will depend entirely on how the
economy unfolds.
A faster than expected recovery would justify the Fed raising rates
sooner, but if the economy goes more slowly than expected and inflation
stays low, then the Fed could delay tightening, Bullard — a voting
member of the Fed’s rate-setting Federal Open Market Committee — told
reporters following a speech to a conference sponsored by the Levy
Economics Institute of Bard College.
Earlier, in response to questions from the audience, Bullard said
the economy is not having a “super strong recovery,” but called it
“robust” and “very reasonable.”
As for the pace of tightening, when the time comes, Bullard
suggested he would not want the Fed to raise rates as slowly and
incrementally as it did earlier in the decade. But he said the pace will
need to be “state contingent,” or data-dependent.
MNI asked Bullard how the FOMC can safely change the “extended
period” language, as some have urged, without sending a premature
tightening signal.
He responded by saying, “what I want is more conditionality.”
Bullard, echoing minutes of the March 16 FOMC meeting, said he
would “want to convey to markets … that it really depends on how the
economy evolves going forward.”
“I would love to tell you a particular date,” he said, “but I
can’t” because “I haven’t seen how the economy is going to perform.”
“Everything depends on the economy’s performance,” he said, adding
that the minutes conveyed that “if the economy performs better than
expected (the Fed could) tighten sooner.”
“If it doesn’t come in as strong or inflation is subdued,”
tightening would come “later,” he said.
Bullard said the conditional language of the minutes “gives a
better flavor than saying on a specific date” the Fed will raise rates.
The Fed “can’t make a promise.”
In the 2004-2006 period, the Fed raised the federal funds rate by
25 basis points at 16 straight FOMC meetings, but Bullard said that was
“too mechanical.” The pace of rate hikes “needs to be state contingent.”
“Maybe this time we’ll get it just right,” he added.
Bullard said the Fed’s purchases of mortgage backed securities and
its overall quantitative easing approach have been “successful.” He said
yield spreads were narrowed significantly and that the asset purchases
“have been very successful … in helping the economy stabilize and
recover.”
“We’re now in recovery,” he said. “It’s not a super-strong recovery
… but it’s a robust, very reasonable recovery.”
Bullard said the Fed is not taking any big risks with the assets on
its balance sheet, although he acknowledged the possibility of “some
interest rate risk.”
He said the spread between the near zero federal funds rate and the
interest earned on its portfolio is 4% or more. As money market rates
rise, he said the Fed’s “margin will be squeezed,” but said rates would
have to “go up a lot before” the fed encountered “significant risks.”
Bullard said the market’s reaction to the end of the Fed’s
mortgage-backed securities purchases has been “reasonable so far.”
He said the Fed will “be watching carefully as weeks go by” to see
how the market reacts to the end of the MBS purchase program on March
30, noting that although the Fed has stopped buying, some actual
deliveries will not take place until June.
But he added, “I think the adjustment has been good.”
In other comments, after calling it an “outrage” that Congress has
not included reform of the government sponsored enterprises in any of
the proposed legislation, Bullard told reporters, “I think we should be
further along than we are in reforming the GSEs.”
“They were at heart of the crisis,” he said, adding that “the
damage to the mortgage market” is at the heart of the economy’s
problems.
“I just see postponement” in dealing with the GSE problem, he
added.
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