ST. LOUIS — St. Louis Federal Reserve Bank President James Bullard said Friday that although the labor market has improved in the past year, the central bank's policy making committee wanted to be sure the progress was sustainable before deciding to pullback on its asset purchase program.
"To the extent that key labor market indicators continue to show cumulative improvement, the likelihood of tapering asset purchases will continue to rise," Bullard said in text prepared for the event.
Bullard told the audience of mostly financial professionals "substantial improvement in labor markets gets easier and easier to satisfy on a cumulative basis as labor markets continue to heal."
However, he cautioned "the committee also wants reassurance that any progress made in labor markets will stick."
Reiterating what he and other committee members have tried to stress as the debate over whether to taper unfolded, Bullard said "any FOMC decision on tapering is data dependent."
He added that data dependence in this case encompasses both cumulative progress in labor markets since September 2012 and a judgment concerning the sustainability of that progress.
Bullard noted that while the unemployment rate and non-farm payroll employment "have shown clear improvement" over the past year, not all indicators have improved. As an example, he pointed to growth in total hours worked, which is slower now than it was before the September 2012 decision to start the latest asset purchase program.
Even when the Federal Open Market Committee decides to pull back on the $85 billion in Treasuries and mortgage backed securities, it will still have a very accommodative policy in place, Bullard said.
"A decision to modestly reduce the pace of asset purchases can still leave a very accommodative policy in place to the extent forward guidance remains intact," he explained.
Bullard added that while the FOMC views the two tools as independent, financial markets view them as closely linked. "This presents challenges for the Committee," he said.
But he added that the financial market reaction to both the June and September FOMC meetings "showed that asset purchases are very effective," Bullard said.
He said key variables, such as the real interest rate, the exchange rate, equity prices and expected inflation, all moved significantly and in the conventional direction following these announcements.
"This demonstrates that changes in the pace of asset purchases have a very similar financial market effect as changes in the policy rate during more 'normal times,'" Bullard said.
While changing the pace of asset purchases acts like a conventional change in interest rates, Bullard said, this effect also spilled over to the expected path of the policy rate.
Bullard said this effect was perhaps surprising to policymakers, who view the two tools as independent, but not to financial markets, which view the two tools as tied closely together.
"The Committee needs to either convince markets that the two tools are separate, or learn to live with the joint effects of tapering on both the pace of asset purchases and the perception of future policy rates," Bullard said.
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