August 2, 2013 / 1:36 PM / 6 years ago

Fed's Bullard: economy improving but needs to get stronger

BOSTON (Reuters) - A top Federal Reserve official said on Friday the U.S. economy was improving modestly but needs to gather more steam, while cautioning that the central bank ought to wait for more evidence of an upturn before tapering bond purchases.

“I’ve been optimistic about the economy and kept projecting that growth is just around the corner, but obviously over the last three quarters growth has averaged only about 1 percent,” St. Louis Fed President James Bullard told Reuters.

“So we need to see some indication that growth is going to pick up in the second half before we can be confident things are improving in the way we need,” he said in an interview.

When it comes to meeting the Fed’s growth targets, Bullard said “the arithmetic is getting harder and harder.” He was speaking to Reuters Insider on the sidelines of an event in Boston to which he gave an address.

In June, Fed Chairman Ben Bernanke detailed plans to start winding down the U.S. central bank’s $85 billion in monthly Treasury and mortgage-backed securities purchases by the end of the year, provided the economy continues to improve.

“The Committee needs to see more data on macroeconomic performance for the second half of 2013 before making a judgment on this matter,” Bullard later said in his speech, referring to the policy-setting Federal Open Market Committee.

That panel met earlier this week, but made no mention of slowing bond purchases and instead highlighted the potential risks of modest growth, higher mortgage rates and low inflation.

That was seen by some as a concession to Bullard, who dissented for the first time at the June policy meeting, saying inflation remained too low to justify slowing bond purchases.

Bullard welcomed a slight rise in inflation in the year to July, to 1.3 percent, but said it still remains “quite a bit below” the Fed’s 2 percent target.


He conceded that the rise “does bolster the committee’s story that some of the factors that have held inflation down were temporary and maybe we’ll see that come back toward target a little bit.”

But he added that “we’re going to need more than one month’s report to make that conclusion.”

Asked why officials at their meeting this week had not spelled out in the accompanying statement their likely intention to begin tapering bond purchases later this year, he said it was important to preserve flexibility while waiting for more evidence of an economic upturn.

“At this point the prudent course is just let’s wait and see what the data brings, and I don’t think any more needs to be said. And I think that is where the committee ended up on this.”

Bullard said the overall economy was improving moderately and said a decline in the U.S. jobless rate to 7.4 percent in July was good news.

He also noted that the drop, from 7.6 percent the month before, took the nation a step closer to reaching a 7 percent threshold that Bernanke outlined as the point when bond buying campaign would end, which he expected to occur in mid-2014.

Bullard said job growth has also been “fairly strong” over the last six to nine months, though he called data on Friday showing the economy added a fewer-than-expected 162,000 jobs “a little bit softer.”

“The committee has a more positive growth forecast for the U.S. economy, but we need to see the data come in and support that. We can’t just act on a forecast alone, because our forecasting record is not very good,” he said.

While the Fed was watching the rise in mortgage rates closely, Bullard said he expected the recovery in housing to remain “pretty strong” with borrowing costs at current levels.

Markets had been prepared for the Fed to start slowing its bond buys as soon as September, though that timeline has been shaken a bit by this week’s Fed statement.


The Fed has held benchmark U.S. interest rates near zero since late 2008 and more than tripled the size of its balance sheet to around $3.6 trillion through three massive waves of bond buying aimed at holding down borrowing costs.

In addition to this so called quantitative easing, the central bank has also deployed forward guidance, vowing to keep rates ultra-low until unemployment hits 6.5 percent, provided the outlook for inflation does not rise above 2.5 percent.

Minneapolis Fed chief Narayana Kocherlakota has argued for lowering the jobless threshold to 5.5 percent in order to more firmly hold down future rate hike expectations. Bullard said that would be a mistake.

James Bullard, President of the St. Louis Federal Reserve Bank, speaks during an interview with Reuters in Boston, Massachusetts August 2, 2013. Bullard said on Friday that the U.S. economy is improving modestly but needs to gather more steam, while inflation remained too low for comfort, underscoring the debate within the central bank over when to scale back stimulus. REUTERS/Brian Snyder

“Changing a threshold would call into question the value of having a threshold at all, because it would signal that the committee was willing to move the threshold around given different circumstances,” he said.

However, he did see merit in adding an additional threshold to place a floor under its inflation commitment.

“We already have a threshold of 2-1/2 percent on the upper side, so it would be symmetric to have 1.5 percent on the lower side. And that would say that in an environment where inflation was quite low, we would not see any need to be raising the policy rate.”

Reporting by Alister Bull; Additional writing by Steven C. Johnson in New York; Editing by James Dalgleish

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