Fed official feels bond purchases unwarranted as growth quickens

Atlanta: A new round of Federal Reserve bond purchases isn't warranted because the US job market and broader economy are strengthening faster than expected, according to St Louis Fed President James Bullard.

"The economic news and economic data, including (the latest) data, has been surprising to the upside," Bullard said on Friday, referring to employment gains. "I need to see significant deterioration in the economy and some threat of deflation or inflation moving significantly below our inflation target before" backing more bond buying by the Fed, he said in a Bloomberg News interview.

Chairman Ben Bernanke said on January 25 the central bank was considering purchasing more bonds to reduce borrowing costs and spur growth. Two days later, New York Fed President William C. Dudley said the economy will probably slow this year due to "significant impediments," and that the central bank "will continue to do its part in supporting the recovery."

Chicago Fed President Charles Evans said on February 2 that economists have suggested asset purchases of around $1 trillion (Dh3.67 trillion), and he may favour a Fed programme "more ambitious than most numbers being bandied about".

Bullard, who doesn't vote on monetary policy this year, was the first Fed official in 2010 to call for a second round of asset purchases. Unlike then, the US isn't at risk of a broad decline in prices similar to what beset Japan, he said.

"Inflation is coming down, but at least for now it is above our inflation target" of two per cent, Bullard said. "We will see how things develop. But I am also more bullish on the economy as a whole. I do think we have momentum coming out of 2011."

Optimistic forecasts

The US unemployment rate dropped to 8.3 per cent, the lowest since February 2009, Labour Department figures showed on Friday. Payrolls rose by 243,000, exceeding the most optimistic forecast in a Bloomberg News survey. Service industries grew by the most in a year, according to a separate report.

US stocks and bond yields rose after the employment report. The Standard & Poor's 500 Index increased 1.5 per cent to 1,344.90 in New York. The yield on the benchmark ten-year Treasury note climbed to 1.92 per cent from 1.82 per cent.

Purchases of Treasuries or mortgage-backed securities are "much more" effective for influencing inflation than for reducing unemployment, which can remain high for reasons such as a mismatch of worker skills with job openings, Bullard said.

The decline in the jobless rate suggests Fed forecasts for unemployment at the end of the year are too high, Bullard said.

The fall in unemployment will probably continue thanks to a decline in weekly jobless claims, he said.

"Surely you could get another half per cent during the year and you might be able to do better than that," Bullard said. "Sub-eight per cent is a reasonable prediction" for the unemployment rate at the end of 2012, with a seven per cent rate possible by the end of next year, he said.

Fed policymakers forecast that the US unemployment rate will be at 8.2 per cent to 8.5 per cent at the end of 2012, and 7.4 per cent to 8.1 per cent late next year.

"The continuing drop in the unemployment rate is inconsistent with the Fed's forecast," said Dean Maki, chief US economist at Barclays Capital Inc. "My guess is that they will revise down their forecast for the unemployment rate," he said.

‘No ability'

The Federal Open Market Committee pledged on January 25 to keep the benchmark interest rate at a record low at least until late 2014. Bullard said he would have dissented from the decision because he opposes tying policy to a calendar date.

The committee has "almost no ability to forecast that far in the future," he said. "My own guess is we will have to move before" late 2014 and begin removing accommodation, Bullard said. The FOMC will continue to debate the date over coming meetings, he said.

"When the economy does change, the economic outlook changes significantly, then the committee is going to come under pressure to change the date," he said.

The Fed, aiming to spur economic growth, pushed down its target interest rate close to zero in Dec-ember 2008 and has engaged in two rounds of asset purchases totalling $2.3 trillion.

The 2014 pledge by the FOMC "does send a very pessimistic signal about the US economy," he said. "The truth is, what basis do we have to send such a pessimistic signal?"

The Fed on January 25, while making the 2014 pledge, released federal funds rate forecasts by policymakers for the first time.

The central bank had previously promised to keep borrowing costs low at least until the middle of 2013.