Bernanke decision ‘inappropriately timed’, says St Louis Fed

According to St. Louis Federal Reserve President James Bullard, Ben Bernanke's decision to offer a path of winding down asset purchases was timed "inappropriately." Mr. Bullard preferred the Fed to "signal more strongly [the Fed's] willingness to defend its inflation goal."

By Richard McGregor
June 21, 2013 3:15 pm
Financial Times

Ben Bernanke’s decision to offer a path to the winding down of the Fed’s asset purchases was timed “inappropriately”, the president of the St Louis Federal Reserve, James Bullard, said.

The Fed decision announced by Mr Bernanke on Wednesday, which would probably lead to the end of asset purchases in mid-2014, was approved by an unusual split vote of 10-2 in the Federal Open Market Committee, with Mr Bullard saying he wanted to “signal more strongly [the Fed’s] willingness to defend its inflation goal”.

In a statement amplifying his dissent, he said that “to maintain credibility, the committee must defend its inflation target when inflation is below target as well as when it is above target”.

“The committee was, through the summary of economic projections process, marking down its assessment of both real [gross domestic product] growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store,” the statement said.

“President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.”

He added that while he disagreed with much in the decision, he believed the FOMC “can conduct an appropriate and effective monetary policy going forward”.

In announcing the decision on Wednesday, Mr Bernanke, the Fed chairman, said the timetable for winding down the asset purchases was the product of a consensus among US central bank officials.

He said a tapering of the $85bn monthly pace of asset purchases would begin later this year – assuming the economic outlook improves as predicted – and continue until the end of the programme sometime in the middle of 2014, as the US unemployment rate falls to 7 per cent.

The platform had been set earlier in the day with the upgrading by Fed officials of their assessment of the US economy.

While the Fed revised down its 2013 growth forecast slightly to 2.45 per cent, it is still forecasting an acceleration in the latter half of this year. It also increased its 2014 growth forecast to 3.25 per cent – above many private-sector forecasts.

Mr Bernanke has consistently said the pace of bond purchases would be adjusted up or down depending on the economic outlook, so an improvement makes it more likely that the US central bank will move towards slowing the rate of QE3 rather than keeping it steady or increasing it.

Fed officials also produced a new set of economic projections, which showed rosier expectations on unemployment than they had previously.

Their 2013 forecast for the unemployment rate was adjusted down from 7.4 to 7.25 per cent and the 2014 forecast from a range of 6.7-7 per cent to 6.5-6.8 per cent.

The lower end of the range coincides with the Fed’s threshold for keeping interest rates at the “exceptionally low levels” close to zero where they have been since the recession and financial crisis.

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