St. Louis Federal Reserve Bank President James Bullard reiterated Thursday that the Federal Open Market Committee should be prepared to vary the pace of Fed asset purchases in response to an evolving economy.
The Fed should stand ready to scale back, though not necessarily end, bond buying as the labor market improves, said Bullard, a voting member of the FOMC who voted to continue $85 billion of monthly purchases of Treasury and mortgage-backed securities on Jan. 30.
The FOMC has said it plans to continue asset purchases until it sees "substantial" improvement in the labor market outlook. But Bullard suggested that it need not wait for the unemployment rate to fall to any particular level before it starts scaling back on asset purchases in remarks prepared for delivery at the New York University Stern School of Business.
"Without an end date, the Committee may have to alter the pace of purchases as news arrives concerning U.S. macroeconomic performance," he said, adding that the FOMC should "consider many different aspects of labor market performance when evaluating whether there has been 'substantial improvement.'"
Bullard observed that "'substantial labor market improvement' does not arrive suddenly."
"This suggests that as labor markets improve somewhat, the pace of asset purchases could be reduced somewhat, but not ended altogether," he said. "This type of policy would send important signals to the private sector concerning the Committee's judgment on the amount of progress made to that point."
The FOMC has also said it will maintain a "highly accommodative" policy "for a considerable period" after asset purchases end and the economy has strengthened. And it has said it will hold the federal funds rate near zero until the unemployment rate falls to 6.5%, provided forecasted inflation does not exceed 2.5%.
Those "thresholds" have been deemed consistent with the earliest rate hike coming in mid-2015.
But Bullard said the St. Louis Fed's economic model projects that "the 6.5% threshold will be crossed in June 2014." And he suggested that monetary policy may be unduly lax.
Citing an estimated "shadow" short-term rate, he said the fund rate is 250 basis points below that recommended by one popular monetary rule, known as Taylor99. That makes Fed policy look "very easy," he said.
And Bullard said that, by converting "Operation Twist" purchases into outright purchases, the FOMC made monetary policy "considerably easier" in 2013 than it was in 2012.
He warned against the FOMC "pretending" that it can target the unemployment rate.
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