A Fantastic Presentation About The Biggest Question Facing The Fed

thenews 2013.08.04 06:35

The biggest question facing the Federal Reserve right now is when it will start slowing down its pace of asset purchases, a process known in financial circles as "tapering" or "the taper."

St. Louis Fed President James Bullard said the central bank should wait for more economic indicators before deciding on whether or not to taper its asset purchases in a speech today.

Bullard told a crowd in Boston that "it is important to wait to see if better macroeconomic outcomes materialize in the months and quarters ahead."

Many have slated September as the time when the Fed would begin to slow down its $85 billion-a-month easing program, but Bullard's comments suggest he may not support that timeline.

Federal Reserve Bank of St. Louis President James Bullard gave remarks Friday on “The Tapering Debate” at the 2013 Municipal Finance Conference, hosted by the Brandeis International Business School. During his presentation, Bullard discussed recent developments in monetary policy. In particular, he noted that at its June meeting, the Federal Open Market Committee (FOMC) authorized Fed Chairman Ben Bernanke to discuss possible plans for reducing the pace of asset purchases, which is often referred to as “tapering” asset purchases. “The financial market reaction was substantial, even though the Committee did not actually change any policy settings at that point or at its recently-concluded July meeting,” Bullard said.

Given that altering the pace of asset purchases will depend on economic conditions, Bullard shared his views on how four areas of macroeconomic performance—labor markets, GDP growth, the Fed’s large balance sheet and inflation—might affect tapering. “The Committee needs to see more data on macroeconomic performance for the second half of 2013 before making a judgment on this matter,” Bullard concluded.

Recent Developments in Monetary Policy

Current U.S. monetary policy has three components: the policy rate, forward guidance and asset purchases, he said. The policy rate has been near zero since December 2008, while forward guidance is a promise to keep that rate near zero at least until unemployment falls below 6.5 percent or inflation rises above 2.5 percent. Asset purchases of Treasury securities and mortgage-backed securities are continuing at $85 billion per month until there is substantial improvement in the labor market, as stated by the FOMC.

As the Chairman has emphasized, any decision on the asset purchase program is conceptually separate from any decision concerning the policy rate. “In particular, a decision to reduce the pace of asset purchases does not change the nature of the Committee’s commitment to keep the policy rate near zero,” Bullard explained. He then discussed some possible arguments that might be made for or against tapering.