JONESBORO, Arkansas (Reuters) - The Federal Reserve is unlikely to be able to forge a consensus to adopt thresholds for guiding expectations on when it will end massive monthly bond purchases, a senior U.S. central banker said on Wednesday.
St. Louis Fed President James Bullard also said that it would make sense to taper off the buying, currently running at $85 billion a month, in order to avoid going “cold turkey” and confusing financial markets.
“It (adopting thresholds) seems sensible, but I don’t think we are going to be able to do that,” Bullard told reporters after delivering a speech at an agribusiness conference here in which he sounded an upbeat note on the outlook for U.S. growth in 2013.
“The asset purchase program is too controversial, both inside and outside the committee, and I don’t think the chairman (Ben Bernanke) can garner enough agreement to do that,” he said.
The Fed says it will keep buying assets until it sees a substantial improvement in the outlook for the labor market.
Some policymakers argue it could give markets more guidance if it tied this commitment to thresholds, and economists had expected it might go in that direction. It has already committed to hold interest rates near zero until unemployment reaches 6.5 percent, provided inflation does not threaten to push over 2.5 percent. U.S. unemployment was 7.9 percent in January.
Bullard, a voting member of the Fed’s policy-setting committee, backed a decision last month to maintain purchases at the current pace. But he said as evidence accumulated that the labor market was healing, the level of bond buying ought be pared back.
“As you see improvement, you should acknowledge that improvement and say we’ll go down to $75 billion a month, or something like that, and as you continue to see improvement you make a little bit more of a tapering,” he said.
“By the time you get to the end of the program, it is because you have accumulated enough data to say that the labor market is substantially improved.”
Economists polled by Reuters expect the Fed to maintain bond purchases until early 2014. Bullard said the open-ended nature of the program meant it would likely have to bring the buying to a gentle close.
“Without an end date, I think we may have to go in that direction because otherwise we’ll be going cold turkey and ending the program suddenly, and I think that would confuse markets,” Bullard said.
He earlier painted a modestly upbeat picture for U.S. growth this year, thanks in large part to calmer conditions in Europe which he said could indicate it was on the road to recovery.
“This year seems to be characterized by less macroeconomic uncertainty compared to previous years,” Bullard told the agribusiness conference, hosted by Arkansas State University. “This bodes well for U.S. macroeconomic prospects in 2013.”
Asked by the audience if he was concerned that the central bank might be risking inflation by pursuing easy monetary policy, Bullard emphasized that U.S. core and headline inflation are running well below the Fed’s 2 percent target and as a result it had “room for maneuver.”
“Global macroeconomic uncertainty has been relatively high in the past three years,” he said. “By contrast, 2013 has dawned with a reduction in global macroeconomic uncertainty that may persist for some time.”
Bullard is one of the more optimistic of the Fed’s 19 members of its policy-making committee. He forecasts U.S. growth of 3.2 percent this year and next, and expects unemployment to decline to around 7.2 percent by the end of 2013.
Reporting by Alister Bull; Editing by Andrea Ricci