Tapering is on Table Next Month – Bullard

St. Louis Federal Reserve president, James Bullard, sat down with Bloomberg Television’s Erik Schatzker this morning live from Bloomberg’s The Year Ahead: 2014 conference in Chicago and said:

  • Taper is ‘on the table’ for the central bank’s next policy meeting and a strong jobs report would increase Dec. Taper chance.
  • Says QE as effective as it’s ever been and doesn’t buy argument that QE has diminishing returns
  • Fed seeks to push people into riskier assets
  • Fed doesn’t directly target asset prices

Pres. Bullard on asset prices:

“They look a little better. The jobs report was a good one, revise the previous three months. Now we are looking at 200,000 jobs per month over the last three months. That is a different picture than what we were looking at before the jobs report. That is somewhat different; GDP has been revised some. Does not look quite as week as it did a couple of quarters ago. So I think things are looking somewhat better. We have another jobs report before the December meeting.

On whether tapering is off the table for the next meeting:

“It is defiantly on the table, but it will depend on the data and we will review things once we get there. A strong jobs report would increase for a December taper…As I saw, the cumulative process argument is the most powerful argument for tapering because the committee undertook that decision in September of 2012 and we said we are looking for better labor market. Well, we have got it.”

On what he expects will happen under tapering:

“We have a lot of experience with interest-rate movement and not as much experience with quantitative easing. And none with tapering. The fact that long-term yields were backed up a long way, 3% off their highs since the December decision, that was a bit surprising. I think the markets will swallow that without a problem.”

On whether we will get another “taper-tantrum”:

“Another tantrum? I hope not. I think in the summer we were talking about tapering, but the data was not coming in very well so there was a disconnect there but if we taper in the situation stronger data, it think we will be okay.”

On whether we will see some of the beneficial effects from asset price inflation:

“Part of the policy has been to buy mortgage-backed securities. The thinking there was certainly that the housing market has been at the heart of the crisis over the last five years, and maybe we can summon that dimension, housing prices are up double digit in many parts of the country over the last year. Equity prices, we do not directly target those, but part of the idea is to make the risk free rate lower and push people into riskier assets.”

On whether he sees evidence of conditions in the market:

“In traditional valuation models, equity prices look fairly valued right now. You just do not see the kind of bubble we has in the 1990’s or the 2000’s in the 1990’s you had the tech bubble, outlandish prices for firms that had no revenue at all. In the 2000’s you saw housing prices way out of line with rent and incomes. We do not see anything like that going on right now. Both of those bubbles were obvious at the time. People were talking about them. The chairman was talking about it. Chairman Greenspan was talking about it at the time.”

On whether asset purchases today are doing less for the economy than they did months, quarters, perhaps even years ago:

“I do not think we should say that about the program either. During the summer, if nothing else happened, it showed this was a super sensitive issue for financial markets, and it has all the conventional effects of easing or tightening policy. We made a hawkish decision in June, and markets reacted as if the Fed was more hawkish and we make a more dovish type decision in December. The market reacted as if that was a dovish decision.”

On whether the economy is many years away from hitting an escape velocity:

“You should think of the QE program as a booster rocket. The Fed Chairman alluded to this in his speech last night, you have the rocket, it is helping you to get to escape velocity. After some point you discarded it. At some point the usefulness of the tocket has gone away. We can eventually wind down the program, and we still have some very low rates for quite a while. The chairman reiterated that we will probably stay at zero beyond the 6.5% unemployed threshold. Many on the committee have said that, and that is probably likely to happen.

On whether the Fed would ever contemplate a negative deposit rate:

“We have talked about lowering our deposit rate down to zero. That has been debated back and forth on the committee. I have advocated for that at times. I would like to study more of the possibility that we could go negative. Right now it is kind of crazy. You are incentivizing banks to hold these reserves and you are paying them to hold the reserves when you want them to lend them out. So you should disincentives that and get them to make more loans. I think it makes a lot of sense, but there are other issues around the debate by the committee… I was in Europe last spring and argued that they need to think about the use of unconventional monetary policy, either some kind of QE program or forward guidance or negative interest rates. When I was there, among staff and others around the policy making process, they had thought about all those options, and now that inflation is quite low in Europe and the latest design GDP in Europe are low, they are coming around to maybe activating some of those approaches to monetary policy. You even had a governing board member mentioned QE Europe, which is the first time that has happened.”

On whether he believes Vice Chairman Yellen supports negative deposit rates:

“I am not sure what her position is on that. You would have to ask her. It has been debated around the committee on numerous occasions, and I think the basic outcome of the debate has been week ago from 25 basis points to 15 or 210, and how much difference would that make? And then would that cause problems in the markets? That is where that debate is right now.”

Video for viewing here.


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