MacroScope

Taper talk: where Fed officials stand on ending QE3

May 30, 2013

In the debate among Federal Reserve policymakers over when and how the U.S. central bank will pull back from its massive bond-buying stimulus, Fed Chairman Ben Bernanke’s voice matters most. But his is far from the only one. Eighteen other policymakers also take part in the Fed’s policy discussions, and Bernanke has a track record of listening to them.

The Fed may offer more clarity on its intentions after its next policy meeting on June 18-19. Until then, what Bernanke and his colleagues say on quantitative easing bears close watching. The following are their views. Voters on the Fed’s policy-setting panel this year are marked with an asterisk (*):

>>Open to cutting back bond buying:

*Fed Chairman Ben Bernanke: The Fed could decide to scale back its monetary stimulus at one of its “next few meetings” if it is confident the economy is poised for continued improvement, he said on May 22. The Fed meets approximately every 6 weeks to decide policy.

*Chicago Fed President Charles Evans: Asked about his views on tapering bond buys, Evans on May 20 said, “I’m going to listen to my colleagues when we get together, whether it’s the next meeting, or the meeting after, or the meeting in the fall.” He said he could also see continuing purchases at the current pace, with a sudden end in the Autumn if by then it is clear the labor market is out of the woods. Evans says he needs to see job gains of at least 200,000 each month for several months, above-trend GDP growth, and a decline in the unemployment rate before he would support an end to bond buying.

San Francisco Fed President John Williams: As long as the labor market continues to improve as he expects, the Fed could taper its bond-buying program by summer, and end it “sometime late this year,” he said on May 16. His current forecast calls for unemployment to fall to just below 7.5 percent by year’s end, for GDP to grow 2.5 percent this year and 3.25 percent next year, and for inflation to stay below 2 percent for the next few years.

*Boston Fed President Eric Rosengren: If the U.S. jobs market and economy improve as he expects, “it may make sense to consider a modest reduction in the pace of asset purchases” after a few months, he said on May 29. He had said previously that the Fed should wait until unemployment falls to 7.25 percent, a level he expects to reach by the end of the year, before considering a tapering or an end to bond purchases. He expects GDP to grow about 3 percent in the second half of 2013.

*New York Fed President William Dudley: Largely because of the unknown economic impact of tighter fiscal policies, the Fed will need another few months before it can determine whether to dial down QE. “I think three or four months from now you’ll have a much better sense of is the economy healthy enough to overcome the fiscal drag or not,” he said on May 21. Dudley, a close ally of Bernanke, has repeatedly stressed that even if the pace of purchases is reduced, the Fed will not necessarily continue to taper in a uniform fashion and can dial buying back up if needed.

*St. Louis Fed President James Bullard: Supports a reduction in bond buying program to reflect a better job market outlook, but not until inflation rises back toward 2 percent. “I am concerned about this inflation number and we are only a little ways out from the June meeting so I don’t quite see how that is going to turn around in a few weeks,” he said on May 24. Earlier this year, Bullard floated a novel approach to weaning the markets from bond-buying stimulus, saying the Fed could reduce its bond-buying by $15 billion for every tenth of a percentage point improvement in the unemployment rate.

*Fed Vice Chair Janet Yellen: Has suggested a willingness to taper as the jobs outlook improves, “Adjusting the pace of asset purchases in response to the evolution of the outlook for the labor market will provide the public with information regarding the committee’s intentions and should reduce the risk of misunderstanding and market disruption as the conclusion of the program draws closer,” she said on April 4. In the same speech she suggested that the stimulus tap should stay open. “Progress on reducing unemployment should take center stage for the FOMC, even if maintaining that progress might result in inflation slightly and temporarily exceeding 2 percent,” she said.

>>Need to push borrowing costs down further/continue QE:

Minneapolis Fed President Narayana Kocherlakota: The Fed should add accommodation by promising to keep rates low until unemployment falls to 5.5 percent, rather than the 6.5 percent threshold the Fed currently has. Kocherlakota has never spoken publicly about what data would prompt him to conclude the labor market outlook has improved substantially, the Fed’s current threshold for ending QE, and has not addressed the idea of tapering purchases.

Atlanta Fed President Dennis Lockhart: Uneasy about a potential mid-year swoon in the economy, Lockhart believes the Fed should continue to buy bonds through the end of the year. He said on Feb. 19 that his “recommendation would be to continue (QE) through the end of the second half” of the year, and on April 10 called it “premature” to focus on reducing bond buys.

>>Taper or end QE immediately:

Dallas Fed President Richard Fisher: The Fed should declare “victory” on housing, immediately begin tapering purchases of mortgage-backed securities and stop buying them by the end of the year, he said on May 16. Fisher also believes the Fed should taper purchases of Treasuries.

*Kansas City Fed President Esther George: Fed policy is currently too easy, and the central bank should scale back bond-buying to reduce risks. George sees U.S. growth this year at 2 percent, and on April 4 repeated a warning that too much accommodation could lead to inflation.

Richmond Fed President Jeffrey Lacker: The Fed should stop buying mortgage-backed securities because the housing sector has recovered, and should reduce the pace of Treasury purchases. On May 3, he said there is no longer “any question” that the labor market outlook has improved substantially since the Fed began quantitative easing last September, and that markets “ought to evaluate the likelihood of us reducing the pace of asset purchases accordingly.”

Cleveland Fed President Sandra Pianalto: The Fed could cut back on bond purchases to reduce the chance they could distort financial markets or encourage excessive risk taking; in addition, she said March 27, a large balance sheet could limit the Fed’s ability to respond to inflationary pressures. “Given our limited experience with our asset purchase programs, slowing the pace of purchases could help minimize the potential risks associated with our large and growing balance sheet,” she said on April 8.

Philadelphia Fed President Charles Plosser: The Fed should begin tapering bond buys in June to reflect the economy’s brighter prospects, he said on May 16.

*Board Governor Jeremy Stein: Although Stein has not spoken directly about his views on tapering the bond-buying program, he expressed worries on Feb. 7 that the current prolonged period of low interest rates could be fueling credit bubbles.

–By Ann Saphir

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