A top Federal Reserve official on Friday criticized the central bank’s timetable for ending its massive economic stimulus program, arguing there should be more convincing data of a self-sustaining recovery before letting off the gas pedal.
St. Louis Fed President James Bullard said the announcement this week was “inappropriately timed.” He noted that officials’ forecast for economic growth this year declined slightly, making any mention of scaling back the stimulus premature.
“I would like to see some tangible evidence before the committee goes off and announces a baseline plan on reducing accommodation,” Bullard said in an interview.
The Federal Reserve has been buying $85 billion in bonds each month in an effort to push down long-term interest rates and turbocharge the recovery. Fed Chairman Ben S. Bernanke said earlier this week that the central bank would probably begin to reduce that amount this year and end the purchases altogether when the unemployment rate hits about 7 percent, which is expected to occur in mid-2014.
Bernanke said the timeline represented the “consensus” at the Fed, though it was not included in the official statement approved by members of the central bank’s influential policy-setting committee. Bullard is a voting member of that group this year and dissented from the official statement.
Bullard said he is particularly worried that inflation is too weak, clocking in at less than 1 percent in recent months. He has pushed for increasing bond purchases if it does not improve soon.
Signaling a reduction, he said in the interview, “was the wrong kind of response given the way the data were coming in.”
“I think the committee should be more respectful of responding to data in a systematic way,” he said. “That’s what builds confidence with markets.”
U.S. stock markets sank after the Fed’s announcement before stabilizing Friday. The major indexes ended the week down about 3.5 percent.
Bernanke “is finding that making a smooth exit from his ultra-easy monetary policies may be much more difficult to accomplish than he expected,” said Ed Yardeni, president and chief investment strategist at Yardeni Research.
Markets had been on edge in recent weeks as investors tried to parse officials’ remarks for clues to the Fed’s intentions — and came up with conflicting answers. In laying out a timeline for ending bond purchases on Wednesday, Bernanke stressed that the central bank will probably hold onto them until they mature. He also emphasized that the Fed will not consider raising short-term interest rates until the unemployment rate hits 6.5 percent or inflation rises above 2.5 percent.
Bullard noted that monetary policy is still providing plenty of support to the economy. But, he added, the sell-off in the markets demonstrates that the direction of the Fed’s movements are important as well.
“You can communicate it one way or another way, but the markets are saying that they’re pulling up the probability we’re going to withdraw from the [bond purchases] sooner than they expected, and that’s having a big influence,” he said in the interview.
According to their economic forecasts published this week, Fed officials believe the economy will grow between 2.3 percent and 2.6 percent this year, down slightly from their previous predictions. They anticipate the recovery will pick up next year to a growth rate between 3 percent and 3.5 percent, slightly better than previously expected.
Those predictions are more optimistic than many private forecasts, however. And the Fed has been too rosy in the past, projecting a return to the heady days of 4 percent growth rate in 2012, then 2013 and finally 2014. Now that pace is not even on the horizon.
That should make officials cautious about signaling a reduction in stimulus too soon, Bullard said.
“The Fed has been predicting a better future for a long time, and it just has not materialized. And so these forecasts aren’t worth that much, including mine,” he said. “So I don’t think you should make important policy changes based on the idea that you’re more optimistic about your forecast. You should wait until you actually see some data.”