April 5, 2012 / 2:02 PM / 5 years ago

UPDATE 2-Bullard: Fed's 2014 rate language too pessimistic

By Mark Felsenthal

ST. LOUIS, April 5 (Reuters) - A top Federal Reserve official said on Thursday that the central bank’s projection of late 2014 for the first likely increase in interest rates sends too pessimistic a signal as the economic recovery strengthens.

“The 2014 language in effect names a date far in the future at which macroeconomic conditions are still expected to be exceptionally poor,” St. Louis Federal Reserve President James Bullard said. “This is an unwarranted pessimistic signal for the (Fed) to send.”

Bullard, who is not a voting member of the Fed’s policy-setting Federal Open Market Committee this year, said the central bank should now pause for several months and assess developments in the economy.

The June end of the Fed’s current program of lengthening the average maturity of its bond portfolio -- known as “Operation Twist” -- should not be interpreted as a de facto tightening of monetary policy if it is not replaced by any new programs, he said.

“I don’t think the end of the program is a particularly significant event,” he said.

Interest rates did not spike as some had feared after the Fed ended past easing initiatives and are unlikely to jump when Twist ends, Bullard added.

His comments illustrate a likely debate within the Fed on whether to declare that recent improvements in labor markets signal the recovery is firmly on track and policymakers should begin to consider the timing of the exiting their ultra-accommodative monetary policy stance.

Bullard is viewed as a centrist on the spectrum of Fed officials, although he has recently stressed his belief in the durability of the recovery and his concern about the risks of committing over a long period of time to an ultra-easy stance.

However, a core group of Fed leaders, including Chairman Ben Bernanke, have been more cautious about the outlook, questioning whether the lofty 8.3 percent unemployment rate will continue falling as quickly as it has since last August.

The Fed cut rates to near zero in December 2008 and has bought $2.3 trillion in bonds to keep rates low and boost growth. Minutes of the Fed’s March policy meeting released Tuesday showed that at that gathering, a dwindling number of officials thought the central bank should launch another bond-buying initiative if the outlook worsened.

Fed officials disagree on how to calibrate policy given the conflicting pressures of continued high unemployment and a brightening outlook for the economy. While some still believe the central bank should be poised to deliver more stimulus should the recovery falter, others like Bullard believe monetary policy is close to the limits of its abilities to spur faster growth.

Bullard on Thursday reiterated his view that the so-called output gap -- how much the economy is falling short of its full potential -- is overstated.

He also said that a recent jump in interest rates for longer-term Treasury securities, while not a warning sign right now, bears close watching lest it signal an onset of an inflationary psychology.

“If the economy started to be a lot stronger, people might put two and two together and say that, ‘Maybe we’re going to get a lot of inflation.’ In that situation, the Fed’s got to be ready to take action,” he said.

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