Fed's Bullard: Careful Justifying Current Policy with Optimistic Outlook

WASHINGTON — St. Louis Federal Reserve Bank President James Bullard Friday indicated his misgivings with the timeline the Fed has laid out for slowing and then ending its current asset purchases, warning against basing current actions on optimistic forecasts as opposed to actual economic outcomes.

In remarks prepared for delivery to the Fifth Annual Rocky Mountain Economic Summit, Bullard argued that caution is needed, and that the policymaking Federal Open Market Committee should wait and see if there is actual improvement in the coming months and quarters.

Bullard holds a voting position on the FOMC this year.

The FOMC announced after its June meeting that it expects to begin tapering its $85 billion a month in U.S. Treasury and mortgage bond buys later this year, with the program ending by mid-2014 on the expectation of faster growth and a 7% unemployment rate.

"Given recent forecasting performance, we should be careful in using an optimistic forecast to justify current policy decisions," Bullard said.

"A more prudent approach would be to wait to see if better macroeconomic outcomes materialize in the months and quarters ahead," he added.

"I have generally been too optimistic ... . Given this experience, I think caution is warranted in taking policy action based on forecasts alone," Bullard reiterated.

Bullard said the recent rise in bond yields is probably not justified by better economic data, nor can it be associated with a rise in inflation expectations. Rather, it appears to be driven by increased optimism concerning future U.S. macroeconomic performance.

While there is reason to be optimistic about improved prospects for the U.S. economy, Bullard again cautioned that "given recent forecasting records, we may want to reserve judgment on this until better data arrive."

"The evidence on current economic performance is mixed," he said, noting for instance that while some measures of labor market outcomes have improved since QE3 was launched in September, "others have not." Bullard also noted that real GDP growth has been slow in recent quarters.

In addition, "Core PCE inflation near 1 percent measured from a year earlier is near the lower edge of acceptable outcomes," Bullard said.

Still, the St. Louis Fed chief acknowledged that many of the factors slowing the economy down are waning.

"Real estate markets are improving, equity markets have rallied, the European sovereign debt crisis remains subdued for now, U.S. fiscal brinksmanship has been less of a problem, and household deleveraging is further along," he said.

On the international front, Bullard lauded the decision by the European Central Bank following its last meeting to unveil forward guidance on future rate policy.

"This may provide more support for the Euro-area economy and ultimately for the U.S., and so may be a bullish factor for the U.S.," he said.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.



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