Small Taper in October is Possible – Bullard

KEENE: What is your advice to fat cats in New York? What can they do in 10019?

BULLARD: They should get out, and see the rest of the country and talk to people in the rest of the country. That’s well actually one of the reasons Warren Buffett I think has this public persona is as good as it is, is partly because he’s based in Omaha.

BETTY LIU, BLOOMBERG NEWS: Right. He’s (inaudible).

BULLARD: The truth is he’s jetting all around the world, but he’s based in Omaha. So I think it makes a big difference.

EISEN: All right. And, Betty, it’s CFO week here on Bloomberg Television. We just spoke to the CFO of UPS.

LIU: I saw that as well. That’s right. I have the CFO of Discovery Network, home of the Oprah Winfrey Channel as well, and Andy Warren. He came on and talked a little bit also about Fed policy, by the way, and what easy money means for his company and easy borrowing.

EISEN: And you don’t have Oprah Winfrey in your district either. There’s a Chicago Fed.

BULLARD: That’s Chicago.

KEENE: And a softball game between St. Louis and Chicago Fed?

BULLARD: No. We play baseball against the Cubs and generally do quite well.

KEENE: James Bullard is from the Federal Reserve Bank of St. Louis. He is with our chief economic correspondent, Michael McKee. Mike?

MCKEE: Thanks, Tom. Well let’s get to this, Jim. You had to know going into the meeting what market expectations were. Why were market expectations so wrong?

BULLARD: I think they were a little more diffuse than they’re being portrayed in the aftermath here. It was like it’s being portrayed as if it was 100 percent. I don’t really think it was. It was more like 60/40, at least some of the surveys that I saw. And so I’m not – and there were people that were saying no taper at this meeting. So I’m not quite so sure that it was as big a shock as –

MCKEE: But you did and figure when you were talking around the table that you would surprise people.

BULLARD: My personal assumption was that it would be somewhat surprising to markets, the decision that we made, although I would say that a $10 billion taper versus zero is not really a big thing. So expectations had already been ratcheted back as the data came in through August and the first part of September. Markets and maybe Fed policymakers too had ratcheted their expectations back. That’s how we got to the talk about a small taper as opposed to larger numbers that were being discussed earlier in the summer.

MCKEE: Well you’ve been using forward guidance as an important tool for policy, but that only works if investors believe what the Fed says. And a lot of them say they don’t now. Did you hurt yourself with that surprise?

BULLARD: Well where I dissented with the committee was at the June meeting. The June meeting was where we laid out this road map. And I thought that that was premature at that point and that we were going to have to get good data in order to verify that road map. That isn’t what happened and so we ended up with this delay at this September meeting. So I think the kind of thing that we did in June I would still say is maybe not the right way to approach this. We were trying to lay out an entire program that would stretch out until next summer about how we were going to reduce the pace of purchases. I prefer to keep it more emphasis on the idea that this is data dependent, we’re going to see how the economy evolves and we’re going to assess the situation. And we’ll make decisions from there. That’s much closer actually to normal monetary policy. And that’s how I’d like to see it run.

MCKEE: Well in June Ben Bernanke said if the data, and he did say if, it came as expected then you would start to taper by the end of the year and finish about the time that unemployment hit seven percent. Are those criterion off the table now?

BULLARD: The seven percent number has never been enshrined in the statement. The committee has never actually committed to that. The chairman put that out as a guidepost, but I would say it is a soft guidepost. He’s indicated as much at the press conference just the other day.

And I would say one other thing that the chairman did a good job of, he said that there was never any promise about a move, particular action at a particular meeting. He said maybe later this year if the data come in as expected.

MCKEE: Well is it going to be later this year? Or do we look to 2014 now?

BULLARD: I would say October is a live meeting. The chairman put on the table that if we want to we can have a press conference at that meeting. So I do think it’s a live meeting. We’ve also got –

MCKEE: Data wise is it?

BULLARD: What?

MCKEE: Data wise is it possible this year?

BULLARD: Well this was a close decision here in September. So it’s possible you get some data that sort of change the complexion of outlook and make the committee be comfortable with a small taper in October. It’s possible. I’m not saying it’s going to happen, but it is possible. And then you have of course other meetings after that.

MCKEE: How much did Janet Yellen drive the decision around the table?

BULLARD: Well she’s an important participant and player on the committee, but everyone makes their own contributions and tries to get their own views on the table.

MCKEE: Is it going to be a different Fed if she’s in charge?

BULLARD: Well I wouldn’t want to pin her down on what she’s going to do. I think we got to let the White House make a decision here on what they want to do in conjunction with the Senate. And then if she does get the job we’ve got to let her map out her strategy I think.

MCKEE: Well the market interpretation is that she’s going to get the job. She is in favor of doing as much as possible to reduce unemployment. So now you’ve got a situation where we’re looking at QE really to infinity that it stretches through next year because you still need to get the economy going. It’s not – the data aren’t telling you you can stop.

BULLARD: Yes again I wouldn’t want to speculate on what her strategies might be. And if she does get nominated of course there will be lots of chances for her to answer all kinds of questions about what her strategies would be. The committee does have a strategy. She’s been on board with that, as have I and most of the other committee members. I don’t think that’s going to change a lot going forward. There will be a lot of continuity I think. And I wouldn’t see big changes ahead.

MCKEE: Now you said earlier that some members of the Fed were surprised by the market reaction after Ben Bernanke started talking tapering. You were not. Really? They didn’t expect that if you start withdrawing stimulus from the economy or provide a little bit less that market rates wouldn’t rise?

BULLARD: I think there was a sense that if we provided some clarity at this June meeting, now we’re talking June, if we provided some clarity or a road map about the way we might withdraw from QE that this would actually be reassuring to markets and possibly reduce some of the uncertainty in markets. And that isn’t what happened. Instead it was viewed as a tightening action and that’s something that I’m an advocate of. I think if you’re going to say it’s accommodative when you’re going up that it’s going to be removing accommodation when you’re going down. And yields went up. So that’s exactly what happened.

MCKEE: Jim Bullard, St. Louis Fed president, thank you very much for coming in today. Go Cardinals.

BULLARD: All right. And thanks, Mike, appreciate it.

EISEN: The question that is going to drive everything is going to be who is the next Fed chairman. How much more difficult does that make your job that we don’t have an answer to that question right now?

BULLARD: It’s a big committee. There’s a lot of talent around the table. I really have a lot of respect for everybody’s views. We think a lot about these issues. We have a great staff. So I really think there’s a lot of continuity in monetary policy making because of that. Of course it matters who the chairman is, but I still think there’s a lot of continuity.

EISEN: All right, Jim Bullard, great having you on. Thank you so much for spending the hour with us, the St. Louis Fed president.

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