Fed's Bullard: FOMC Needs More Data Before Tapering
The Federal Open Market Committee needs to have more data on labor markets, GDP, inflation and the Fed's balance sheet before agreeing to taper purchases of assets, Federal Reserve Bank of St. Louis President James Bullard said Friday.
When the issue of tapering was first discussed publicly in June, "The financial market reaction was substantial, even though the Committee did not actually change any policy settings at that point or at its recently-concluded July meeting," Bullard said, according to a release on his talk "The Tapering Debate" at the 2013 Municipal Finance Conference hosted by the Brandeis International Business School.
Since the Fed said the tapering will depend on economic conditions, Bullard said, "The Committee needs to see more data on macroeconomic performance for the second half of 2013 before making a judgment on this matter."
Conceptually, he reminded, the policy rate is separate from the $85 billion a month purchases of Treasury securities and mortgage-backed securities. "In particular, a decision to reduce the pace of asset purchases does not change the nature of the Committee's commitment to keep the policy rate near zero," Bullard explained.
Arguments can be made for and against tapering, he noted. While certain indicators of labor strength are better (the unemployment rate and payroll employment growth), others (the labor force participation rate and the employment-population ratio) have not seen such improvement. So the FOMC needs to determine which measures it will use to determine labor market health.
While GDP has been weak, and the FOMC would normally not remove accommodation during those periods, it may if future strong growth is seen.
The tapering debate hinges on whether it should be based on recent performance or projected growth. "If the former, then growth has clearly been weak in recent quarters. If the latter, then growth may be judged to be improving, but forecasting performance for this variable has been poor over the last several years," he said.