Bullard says Fed should delay ending QE to assess weakening inflation
(Reuters) – The Federal Reserve is likely to reassure investors later this month that it won’t stand idle if global turbulence threatens the U.S. economy, but a proposal from one top policymaker to keep on buying bonds looks to be a bridge too far.
James Bullard, who heads the St. Louis Fed, suggested on Thursday that sticking with bond purchases for a few more months would give policymakers the time needed to assess a recent deterioration in the inflation outlook.
“Inflation expectations are dropping in the U.S. and that is something that a central bank cannot abide,” Bullard said on Bloomberg Television.
A sharp decline in the unemployment rate over the past year had given the U.S. central bank confidence it could bring its so-called quantitative easing of monetary policy, or QE, to an end at its next meeting on Oct. 28-29, and it had bolstered the forecast of many officials for a mid-2015 interest rate hike.
Indeed, Bullard said he was sticking with his projection for a first quarter rate increase for now.
But mounting signs of weakness overseas, particularly in euro zone powerhouse Germany, and a related drop in global stock markets have led investors to question the central bank’s resolve. Perhaps most troubling for the Fed, bond market measures of inflation expectations have turned sharply south.
Minneapolis Fed President Narayana Kocherlakota, who is seen as one of the officials most worried about the U.S. recovery’s strength, told bankers and farmers in Billings, Mont., that a rate hike at any time in 2015 would be “inappropriate.”
The Fed has been struggling for years to get inflation back up to its goal of 2 percent.
Speaking on the sidelines of an event in Washington, Bullard told Reuters a “QE pause would possibly send the signal that we do want to keep inflation expectations stable.”
Economists, however, said such a dramatic course change was not needed, although the Fed would want to demonstrate sensitivity to the risk that global weakness, dollar strength and a loss of stock wealth could undermine the U.S. recovery. Traders have already pushed their rate-hike expectations into late next year.
“I don’t expect the Fed at this stage to change course,” former Richmond Fed President Alfred Broaddus told Reuters. “But if the selloff continues and threatens the domestic economy, they would have to signal that there will be more accommodation in one way or another.”
