ST LOUIS - St. Louis Federal Reserve Bank President James Bullard Thursday said while he is not concerned about the recent rise in bond yields, it does warrant close monitoring, especially if it signals a rise in inflation expectations.
Speaking to reporters after a speech at the 13th Annual InvestMidwest Venture Capital Forum, Bullard also cautioned against assuming that the end of the Fed's Operation Twist program -- the buying long-term U.S. Treasury debt while selling shorter dated securities -- is the end of the central bank's easing policy.
The yield on the 10-year Treasury note was at 2.04% after the February employment was published March 9, but is now at 2.20% as of today.
"So far I think the backup in bond yields has not been too much of a problem," Bullard said, but, "I keep a close eye on that."
"I would be worried if inflation expectations started to move," he added.
With markets seeing indications that fewer members of the Fed's policymaking Federal Open Market Committee anticipate the need for additional monetary stimulus, some view the conclusion of Operation Twist in June as possibly marking at least the beginning of the end of the Fed's support for the economy.
Bullard -- who does not vote on the FOMC until next year -- noted however that the zero rate policy will still be in place and is currently estimated to remain until late-2014.
"I don't think the end of (Operation Twist) is a particularly significant event," he said. "I take exception to what's being said about this in markets ... that you don't have any monetary stimulus left."
"I don't think it's like we're taking everything off the table as of June 30," he added.
Bullard also cautioned against reading too much into the economic forecasts by the FOMC:
"Our forecasts over the medium term and long term, other than the inflation forecast, are going to be subject to as much uncertainty as everybody else's, so I think they're of limited value," he said.
"The amount of uncertainty around these forecasts is very large," Bullard said. "On inflation, which is something the central bank can control .. you'd better be saying 2% because that is our target ... but on other variables, they are going to be driven by other factors which are outside the control of the central bank and depend on many variables."
Fed Chairman Bernanke has indicated he is in no rush to begin withdrawing the Fed's support for the economy due to the stubbornly high unemployment rate and a growth pace that remains below par.
Bullard agreed that the United States' long run trend growth has been lower than it has been historically, saying the low 2% range "is a good guess."
As for the employment outlook, Bullard forecast that the U.S. unemployment rate will be below 8% by the end of this year, noting his January forecast had the unemployment rate at 7.8% by the end of 2012.
"I do think it will continue to tick down ... . Okun's Law is like (in) the Pirates of the Caribbean, it's more of a guideline. It doesn't fit the data that well. Especially in the last three expansions, it has not fit the data that well." He was referring to the movies' frequent references to the so-called Pirates' Code being less than ironclad.
"Lower unemployment doesn't mean it's a great economy. It just means time is marching on and people have to make do with the employment situation that they have," Bullard added.
Bullard only took a few questions from the audience following his speech. He was asked about China and the concerns about slowing growth within its economy.
"There is a concern that China is a little bit slower right now. The data does still show that ... . But my sense is that China is pretty robust overall and the growth there can continue at a high level," Bullard said.
Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.