Photo: St. Louis Fed
Thursday’s release of the FOMC minutes from the Federal Reserve’s December monetary policy meeting threw markets for a loop.The minutes revealed that several members of the Committee favoured halting the Fed’s bond buying program – quantitative easing – by the end of this year, given current trends in U.S. economic data.
The revelation about quantitative easing is not inconsistent with the Fed’s public commitment in December to maintain ultra-low interest rates at least until the unemployment rate hits 6.5 per cent.
However, it gave the impression that the tone within the Federal Reserve is decidedly more hawkish than its recent policy announcement tying the interest rate outlook to unemployment thresholds would suggest.
St. Louis Fed President James Bullard was on CNBC Friday afternoon discussing the Fed’s stance on quantitative easing as detailed in the minutes.
CNBC reporter Steve Liesman asked Bullard, given the suggestion that the FOMC could end bond purchases by the end of 2013, when exactly markets could expect such a thing.
Bullard told Liesman:
I think unemployment will continue to tick down through 2013. If you look at the last three years – about seven-tenths per year on the unemployment rate – if we got that this year, we’d be down at 7.1 per cent by the end of the year, something like that. That would probably be substantial improvement, and the Committee could think about removing accommodation on the balance sheet side of the policy at that point.
Liesman asked for clarification, and Bullard continued:
If you got down close to 7 per cent, then you’re within a half a point of your 6.5 per cent on the interest rate side, and I think clearly the intention is to pull back balance sheet policy sometime before you would start thinking about raising the rate.
Again, this isn’t inconsistent with what was said in the minutes, but it offers a big clue as to when the Fed might decide to pull back from its bond-buying efforts, and defines a bit more clearly what was revealed in the minutes released Thursday.