The US Federal Reserve could begin to reduce its asset purchases as early as October if economic data improve, a senior Fed official said as he hit back at critics of the central bank’s communications on its bond-buying programme.
James Bullard, president of the Federal Reserve Bank of St Louis, spoke at the end of a tumultuous week in central banking. Not only did the Fed stun markets by declining to move ahead with a tapering of its bond buying programme, but India’s central bank on Friday confounded investors by raising interest rates to combat inflation.
Mr Bullard defended the Fed’s decision and said tapering could “certainly” start at the next meeting of the Federal Open Market Committee in late October, if the central bank sees a measurable improvement in the economic outlook, including stronger inflation and employment numbers.
“Sometimes the jobs report can change the whole contour of how the [FOMC] can look at the data,” Mr Bullard told reporters in New York.
Earlier Friday, Esther George, the president of the Federal Reserve Bank of Kansas City who dissented from the Fed’s decision to hold firm on $85bn of asset purchases per month, said in New York that the failure to “follow through” with tapering threatened the central bank’s credibility.
“The actions at this meeting, and the expectations that have been set relative to how markets were thinking about this, created confusion, created a disconnect,” Ms George said.
Such criticism had also been voiced by many economists and investors since Wednesday’s decision, but Mr Bullard rejected it.
“We said it was data dependent. I think it enhanced our credibility in the sense that it showed we really are paying attention to data,” he said.
The Fed’s decision buoyed stocks and bonds during the week. US equities registered their third consecutive week of gains, although the S&P 500 eased 0.7 per cent on Friday after hitting a record intra-day peak of 1,729.86 on Thursday.
Global equity funds saw their biggest weekly inflows on record in the five-day period ending Thursday, according to Bank of America Merrill Lynch, with $26bn put into exchange-traded funds that track stocks.
During the week, the dollar fell more than 1 per cent. The yield on the 10-year Treasury note ended at 2.73 per cent, down from a high of 2.90 per cent. Gold prices were slightly lower on the week at $1,326 an ounce.
Despite Mr Bullard’s defence of Fed communications, some economists continued to question the effectiveness of its guidance on Friday.
Ethan Harris, global economist at BofAML, wrote in a note: “When bond yields drop 16 basis points on the day of a Fed meeting, you can be sure there has likely been a major miscommunication between the Fed and the markets.”
Mr Harris, who was in the minority of economists predicting a December taper before this week’s meeting, said the breakdown was caused by “not only a mute Fed, but markets that didn’t listen”.
He said a “crucial gap” in Fed communication came with Mr Bernanke’s decision not to speak at the Jackson Hole conference in late August. He added that Fed officials had probably not made up their minds about whether to taper or not this month until the last minute.
The Fed move was followed by the decision on Friday by Raghuram Rajan, the new governor of the Reserve Bank of India, to raise its main interest rate to fight stubbornly high inflation.That move also surprised investors, highlighting the perils of more open monetary policy communications around the world.
Mr Bullard, a voting member of the FOMC this year, told Bloomberg Television he thought the Federal Reserve does “as good a job as we can do on communication but there is a lot of uncertainty when you are tracking the economy”.
He brushed aside criticism that Mr Bernanke and the Fed got ahead of themselves in June by setting out a presumptive timeline for ending quantitative easing. “The transparency cat is out of the bag and we are not going to go back to a situation where we have the kind of smoke signals we had in the 80s and 90s. That was probably not a good way to do business,” Mr Bullard said.
Mr Bullard has been among the more cautious Fed officials on the question of tapering, primarily because of his concerns that inflation is still too weak, and well below the 2 per cent long-term target used by the central bank.
“We can afford to be patient, we don’t have to hustle,” Mr Bullard told Bloomberg. “The committee came down on the side of ‘why don’t we just wait?,” he said, noting that it was a “borderline” decision and there was not a huge difference between no tapering and a relatively small $10bn per month reduction in asset purchases.
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