NEW YORK – Calling the Federal Open Market Committee’s setting of 2014 as the time for a possible change in rates “an unwarranted pessimistic signal,” Federal Reserve Bank of St. Louis President James Bullard warned that conditions could still be “exceptionally poor” then.
“If the economy is performing well at the point in the future where the promise begins to bite, then the Committee may simply abandon the promise and return to normal policy,” Bullard said. “But this behavior, if understood by markets, cancels out the initial effects of the promise, and so nothing is accomplished by making the initial promise.”
The recent positive data allowed the Federal Open Market Committee “to pause in its aggressive easing campaign,” Bullard told the 13th Annual InvestMidwest Venture Capital Forum, according to a press release from the Bank.
“An appropriate approach at this juncture may be to continue to pause to assess developments in the economy,” he stated. Concerning the FOMC’s “late 2014” language regarding the time near-zero rate policy is expected to remain, Bullard warned it may be counterproductive. “The Committee’s practice of including distant dates in the statement sends an unwarranted pessimistic signal concerning the future of the U.S. economy.”
While in 2014 “macroeconomic conditions are still expected to be exceptionally poor,” the release notes, “neither the Fed nor any other forecaster has a clear idea of what macroeconomic conditions will be like at that time.”
Bullard said the output gap “may be smaller than typical estimates suggest,” since they generally include the “housing bubble” as part of the normal level of output. “It is neither feasible nor desirable to attempt to re-inflate the U.S. housing bubble of the mid-2000s,” Bullard said.
“The ultra-easy policy has been appropriate until now, but it will not always be appropriate,” he said. Some actions the FOMC might now would have effects for several years, Bullard stated. “As the U.S. economy continues to rebound and repair, additional policy actions may create an over-commitment to ultra-easy monetary policy.”
Bullard noted that labor market policies have direct effects mainly on the unemployed, but “monetary policy is a blunt instrument which affects the decision-making of everyone in the economy.” It hurt savers. He suggested, “It may be better to focus on labor market policies to directly address unemployment instead of taking further risks with monetary policy.”U.S. homeowners have about $9.9 trillion in mortgage debt, while equity totals $712 billion. According to Bullard, households would have to pay down this debt by about $3.7 trillion to return to a normal loan-to-value ratio of 58.4%. The amount is roughly equal to one-quarter of one year’s GDP. “This will take a long time,” he said. “It is not a matter of business cycle frequency adjustment.”
