By Mark Felsenthal
ST. LOUIS, April 5 A top Federal Reserve
official said on Thursday that the central bank's projection of
late 2014 for the first likely increase in interest rates sends
too pessimistic a signal as the economic recovery strengthens.
"The 2014 language in effect names a date far in the future
at which macroeconomic conditions are still expected to be
exceptionally poor," St. Louis Federal Reserve President James
Bullard said. "This is an unwarranted pessimistic signal for the
(Fed) to send."
Bullard, who is not a voting member of the Fed's
policy-setting Federal Open Market Committee this year, said the
central bank should now pause for several months and assess
developments in the economy.
The June end of the Fed's current program of lengthening the
average maturity of its bond portfolio -- known as "Operation
Twist" -- should not be interpreted as a de facto tightening of
monetary policy if it is not replaced by any new programs, he
"I don't think the end of the program is a particularly
significant event," he said.
Interest rates did not spike as some had feared after the
Fed ended past easing initiatives and are unlikely to jump when
Twist ends, Bullard added.
His comments illustrate a likely debate within the Fed on
whether to declare that recent improvements in labor markets
signal the recovery is firmly on track and policymakers should
begin to consider the timing of the exiting their
ultra-accommodative monetary policy stance.
Bullard is viewed as a centrist on the spectrum of Fed
officials, although he has recently stressed his belief in the
durability of the recovery and his concern about the risks of
committing over a long period of time to an ultra-easy stance.
However, a core group of Fed leaders, including Chairman Ben
Bernanke, have been more cautious about the outlook, questioning
whether the lofty 8.3 percent unemployment rate will continue
falling as quickly as it has since last August.
The Fed cut rates to near zero in December 2008 and has
bought $2.3 trillion in bonds to keep rates low and boost
growth. Minutes of the Fed's March policy meeting released
Tuesday showed that at that gathering, a dwindling number of
officials thought the central bank should launch another
bond-buying initiative if the outlook worsened.
Fed officials disagree on how to calibrate policy given the
conflicting pressures of continued high unemployment and a
brightening outlook for the economy. While some still believe
the central bank should be poised to deliver more stimulus
should the recovery falter, others like Bullard believe monetary
policy is close to the limits of its abilities to spur faster
Bullard on Thursday reiterated his view that the so-called
output gap -- how much the economy is falling short of its full
potential -- is overstated.
He also said that a recent jump in interest rates for
longer-term Treasury securities, while not a warning sign right
now, bears close watching lest it signal an onset of an
"If the economy started to be a lot stronger, people might
put two and two together and say that, 'Maybe we're going to get
a lot of inflation.' In that situation, the Fed's got to be
ready to take action," he said.