Fed’s Bullard identifies four considerations before ending QE3

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President James Bullard of the Federal Reserve Bank of St. Louis discussed his current stance on monetary policy, noting that 2013 policies are considerably easier than 2012.

Regarding the Fed’s balance sheet policy, with outright asset purchases replacing the “Operation Twist” program, Bullard noted that it was not has effective as he hoped.

"Open-ended outright purchases are a more potent tool," Bullard said to the Center for Global Economy and Business at New York University’s Stern School of Business on Thursday. 

Furthermore, Bullard said that the Federal Open Market Committee is committed to maintain an "aggressive asset purchase program" and identified four conditions going forward that the Committee must observe before ending the program. 

While labor market improvement is a condition for ending the program, Bullard noted that the FOMC may consider different aspects of labor performance including unemployment, employment and hours worked when decided whether there has been "substantial improvement."

Additionally, without a definitive end date for QE3, the Committee could alter the pace of Treasury and mortgage-backed securities purchases as a result of macroeconomic performance, Bullard noted.

The January FOMC minutes released Wednesday [3] similarly noted that many Committee participants emphasized that the Fed should be prepared to vary the pace of monthly bond purchases due to the risk and benefits of further commitment to QE3 [4]. 

"This suggests that as labor markets improve somewhat, the pace of asset purchases could be reduced somewhat, but not ended altogether," Bullard said. 

He added, "This type of policy would send important signals to the private sector concerning the Committee’s judgment on the amount of progress made to that point." 

Recent readings on inflation are rather low, which Bullard noted may give the FOMC some leeway to continue asset purchases for long than anticipated. While concerns about rising inflation have so far been unfounded "the lesson from QE2 is that inflation and inflation expectations did trend higher." 

As a result, it’s too early to know if that will happen wit the current program, the St. Louis Fed president noted.

The size of the Fed’s balance sheet may also inhibit the Committee’s ability to exit QE3 from the "current very aggressive monetary policy." Bullard explained that when interest rates rise, asset values will fall, which could complicated monetary policy decisions. 

"2012 policy was characterized by a relatively weak 'Operation Twist' program combined with somewhat counterproductive date-based forward guidance," Bullard said.

In contrast, "2013 is characterized by a relatively potent open-ended outright asset purchase program combined with more effective threshold-based forward guidance," he noted. 

cmlynski@housingwire.com [5]