Despite a substandard jobs report from last Friday, St. Louis Federal Reserve Bank President James Bullard thinks it might be time to scale back the central bank’s asset purchasing program known as quantitative easing.
Bullard told CNBC’s Squawk Box Tuesday morning that as the economy improves, the Fed should gradually lift its investment, currently running at “$85 billion a month of Treasury and mortgage-backed securities purchases,” CNBC writes.
“You could adjust [QE] up or down” Bullard said. “But the economy will most likely continue to improve and we’ll be in a position to slowly ratchet down the pace of purchases. I think that’s a great policy.”
Federal Reserve Chairman Ben Bernanke has said that he will continue with quantitative easing until the unemployment rate improves. Last Friday, the Bureau of Labor Statistics announced the unemployment rate was 7.6 percent, though the declining number of Americans counted in the work force detracted from the improving unemployment percentage.
“I wouldn’t change my forecast based on this,” Bullard said, adding that economic growth for the first quarter looks “quite a bit stronger than we expected at the beginning of January.”
The Federal Reserve system holds to a macroeconomic theory in which the supply of available money can be intelligently expanded or (less frequently) contracted by central planners responding to statistical signals. Since 1977 the Fed has held a “dual mandate,” requiring the central bank to “maintain long run growth of the monetary and credit aggregates” and also to “promote effectively the goals of maximum employment.”
According to San Francisco Federal Reserve President John Williams’s forecast, a let-up on quantitative easing could come as soon as this summer as the economy starts to pick back up. Bullard said once the unemployment level reaches the low 7 percent area, people will begin to think about reducing the Fed’s asset purchase levels.
Bullard’s and Williams’ comments assume an economic recovery for which evidence is at best mixed. But it’s not clear the Fed’s decision will make much difference in unemployment anyway, as the theory upon which the central bank’s dual mandate rests — the “Phillips curve,” which posits an inverse relationship between inflation and unemployment — has been disproven by many historic cases of high unemployment concurrent with high inflation. The most recent American example was the “stagflation” period of the late 1970s and early 1980s.
The Fed’s extremely rapid monetary expansion under both the Bush and Obama administrations has also failed to bring unemployment below 7 percent. Consumer Price Index inflation has been positive 2 percent in the last 12 months. The dollar has lost about 12 percent of its value since the start of the recession in 2007, despite very low levels of growth in the economy.
Still, Fed officials remain confident in their view. “I’m still projecting unemployment to be down near 7 percent by the end of the year, and so far I’m winning on that… I do not think that people will suddenly decide to come back to the labor market… I just don’t see that until you get to lower levels of unemployment,” Williams said in his report.
Addressing concerns that people are exiting the labor market, Bullard noted that this trend has been observed since 2000 and that analysis of the labor market needs to account for that fact.
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