August 15, 2013 / 3:05 PM / 6 years ago

UPDATE 1-Bullard - new Fed chair will preserve policy continuity

By Alister Bull

LOUISVILLE, Ky., Aug 15 (Reuters) - The arrival of the next head of the Federal Reserve should not spell an abrupt change in U.S. monetary policy, a top central banker said on Thursday.

St. Louis Fed President James Bullard also said that if policymakers opt to start scaling back bond buying by a small amount, this would be interpreted by financial markets as a gradual approach to ending the $85 billion-a-month program.

“Monetary policy is made by a committee and I think there will be a lot of continuity. A lot of the same people will be around as we make this transition in the chairmanship,” he told reporters after making remarks at a breakfast event.

President Barack Obama says he will make a decision in the fall over who to nominate to replace Fed Chairman Ben Bernanke, whose current term expires in January. Obama also says Fed Vice Chair Janet Yellen and former White House aide Lawrence Summers are both candidates for the job, along with a couple of others.

“I would expect a lot of continuity in policy, and I think any new person coming in would want that continuity. They don’t want to come in and really rock the boat a lot. So I would expect a smooth transition,” Bullard said.

Economists view Summers as having a somewhat more hawkish policy outlook than Yellen. As a result, they feel he might be more likely to raise interest rates sooner, or to resist prolonging bond buying if the economy should falter.

That said, whoever Obama picks will take the helm of a Fed that has already made some significant commitments to the path of future policy that will constrain their room for maneuver if they had a different view.

The Fed cut interest rates to almost zero in late 2008 and says it will keep them on hold until unemployment reaches 6.5 percent, so long as the outlook for inflation does not rise above 2.5 percent.

Remarks Summers made earlier this year indicate he thinks the jobless rate may fall to 6.5 percent faster than many people think, and that the so-called level of natural unemployment may have drifted higher.

That view would indicate less enthusiasm for keeping rates ultra-low once the 6.5 percent threshold is reached, because Summers might feel there is not much slack left in the economy that needs to be accommodated by extremely cheap money.

The Fed - the U.S. central bank - says it expects to start reducing the amount of bonds it buys later this year and end the program around mid-2014, when it expects unemployment to be 7 percent.

Bullard said that the size of the initial ‘taper’ is important, and will be viewed by financial markets as a signal on the pace of subsequent reductions.

“A larger move would be interpreted as a faster pace of reduction in purchases, and a smaller move would be considered a more hedged bet or a slow rate of reduction in purchases,” he said.

Fed officials have generally viewed the total stock of their asset-buying program as more important for monetary policy than the flow of monthly bond buys.

But Bullard said the lesson of June’s Fed policy meeting, where news of a planned taper later in the year sent global markets into free-fall, was that flows matter after all.

“If you are going to change that flow you are going to get important effects on markets ... that was a clear lesson from June,” he said.

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