STARKVILLE, Mississippi The Federal Reserve has ramped up its monetary stimulus "considerably" this year compared with 2012, thanks to two significant changes, a senior Fed official said on Thursday.
James Bullard, president of the St. Louis Federal Reserve Bank, said the switch to outright open-ended bond purchases, plus adopting thresholds to guide expectations on when the Fed would begin raising interest rates, had made policy more effective.
"The current stance of U.S. monetary policy is considerably easier than it was in 2012," Bullard, a voter on the Fed's policy-setting committee this year, told a luncheon banking forum at Mississippi State University. The Fed has "put the pedal to the metal," he said.
He later said this easier policy stance was appropriate as inflation remained well below the Fed's 2 percent target.
The central bank replaced its program, known as Operation Twist, of reinvesting the proceeds from the sale of shorter-dated securities into longer-dated bonds with outright bond buys, starting in January. Bullard said Twist had been relatively weak in terms of its policy punch.
In addition, the Fed has adopted thresholds to guide expectations on interest rates and has now committed to holding them near zero until unemployment reaches 6.5 percent, so long as inflation does not threaten to rise above 2.5 percent. The U.S. jobless rate in January was 7.9 percent.
Thresholds replaced a commitment to hold rates down until at least mid-2015, which economists complained could undermine the Fed's efforts to bolster confidence in a U.S. recovery.
"The date could be interpreted as a statement that the U.S. economy is likely to perform poorly until that time," he said. "I have called this an "unwarranted pessimistic signal."
As a result of dropping the date and shifting to outright bond buying, "2013 is characterized by a relatively potent open-ended outright asset purchase program combined with more effective threshold-based forward guidance," Bullard said.
Critics of the Fed's aggressive efforts to support a fragile U.S. recovery warn these actions could spur future inflation. Three rounds of so-called quantitative easing have tripled the size of the Fed balance sheet to around $3 trillion since 2008.
Bullard said so far, inflation fears have been unwarranted, and argued that while the growth in the Fed's balance sheet might hinder a "graceful exit" when it starts to tighten policy, the lack of price pressures gave it room to maneuver.
"Current readings on inflation are rather low," Bullard said. "This may give the Committee some leeway to continue purchases longer than otherwise."
The Fed has said it will keep buying bonds until it sees substantial improvement in the outlook for the labor market.
Bullard reiterated that it made sense to slow the buying as data improved, rather than to suddenly bring the purchases to a halt, and said this could even be done in a predictable fashion as the jobless rate declined.
"You could use a formula that would be on the order of every tenth on the unemployment rate, you could bring the pace of purchases down by $15 billion per month," he told reporters.
Bullard made clear he was only speaking for himself, and not the other 18 members of the Fed's policy committee, although if it was up to him, he would be willing to begin slowing bond buying as soon as the jobless rate dropped.
"That is just my idea. I don't think anybody's really gotten to a decision on that kind of formula," he said.