Fed's Bullard: December Taper 'Definitely on the Table'

The International Economic Forum Of The Americas' Conference Of Montreal
David Vilder/Bloomberg via Getty ImagesSt. Louis Federal Reserve Bank President James Bullard.
WASHINGTON -- Recent U.S. economic data is looking better and a solid jobs report for November would increase the likelihood that the Federal Reserve would start to scale back bond buying at its meeting next month, a senior Fed official said Wednesday.

"It is definitely on the table, but it is going to depend on the data," James Bullard, president of the St. Louis Federal Reserve Bank, told Bloomberg television. "A strong jobs report, I think, would increase the probability some for a December taper."

Bullard is a voting member of the Fed's policy-setting committee this year.

The central bank at its October policy meeting voted to keep buying bonds at an $85 billion monthly pace, delaying a decision to start scaling back the program until it saw more evidence of a durable recovery that could sustain job creation.

The Fed had stunned markets in September when it opted to keep buying bonds at the same pace, after allowing expectations to harden over the summer that it was getting set to taper. Yields on longer-term bonds, which had risen sharply on expectations of tapering, snapped back when the Fed opted to stick with the $85 billion pace.

Bullard said that when the Fed does eventually decide to start reducing bond purchases, markets would be better prepared.

"If we taper because we see a stronger economy, %VIRTUAL-article-sponsoredlinks%I think the markets will swallow that without a problem," he said.

The U.S. central bank has held interest rates near zero since late 2008 and quadrupled its balance sheet through three huge bond-buying campaigns aimed at spurring growth and hiring by holding down long-term borrowing costs.

Bullard said October's employment report, which showed creation of 204,000 new jobs, and an upward revision in the number of jobs created in the previous months had raised average job creation.

"Now we're looking at 200,000 jobs per month over the last three months. That's a lot different picture than we were looking at before the jobs report," he said. "This cumulative progress argument is the most powerful argument for tapering."

The Fed spelled out when it launched the latest round of bond buying in September 2012 that it would continue until policymakers saw a substantial improvement in the outlook for the labor market. Bullard argued this was now the case.

"I think we have met that test. And the only question is, can we sustain that going forward and what about inflation?" Bullard said.

Bullard had dissented in June against the Fed's decision to talk about tapering bond buying because he was concerned that inflation was too low.

The U.S. consumer price index for October rose by 1 percent on a yearly basis, data released Wednesday showed. The Fed has a 2 percent medium-term inflation goal. Its preferred gauge of price pressures, the PCE price index, is reporting even more muted levels of inflation.

While an improving economy has policymakers thinking about paring back some of their monetary stimulus, a turn for the worse would prompt discussion about expanding the central bank's toolkit for fostering stronger growth.

Bullard said one option would be for the Fed to pay a lower rate of return on the money banks park at the institution, and perhaps even a negative rate of return.

"The committee has debated this repeatedly over the last four or five years," he said, saying the option was not currently on the table.

"If the economy took a downturn then I think we would look at it a lot harder," he said.

Making banks pay to deposit cash with the central bank overnight is policy option is currently under consideration at the European Central Bank, news agency Bloomberg said Wednesday, citing unnamed sources.

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Fed's Bullard: December Taper 'Definitely on the Table'


So you're seeing a lot of strength in housing, and it's coming from almost every place geographically ... So that's sort of the big winner. Auto and that whole complex is a big winner. They're doing over 15 million cars this year, up from 8.5 at the bottom. And then you have the energy complex, which is really, really a revolution. This is hard to underestimate the impact of energy and all the natural gas that's being produced and all the subsidiary types of things that come from that activity. And if you add on top of that, technology which is still a very big pocket of strength and quite robust in the United States, you've got some really good stuff happening.

On the other hand we do have the U.S. government at work, trying to decrease growth as rapidly as they can. And so they've, unfortunately, had some success in that area, and that leaves us somewhere in the 2%-plus area.

We think that the next big risk in the industry is rising interest rates. And so we're very focused on what happens when interest rates return to a more historically normal level.

On the positive side, economic fundamentals in the United States continue to improve. The main impediment to growth appears to be the speed and nature of the withdrawal of fiscal stimulus. Debate has actually now opened up on how and when to withdraw some of the monetary expansion. All of this is very good news.

At the same time, the rest of the world looks no stronger. Europe is mired in a recession, Asian growth seems more modest and Japanese attempts to restimulate their economy through monetary stimulation have set off further downward pressure on interest rates and currency values.

The overriding driver of recovery in the housing market remains the underproduction of both single and multifamily product throughout the economic downturn and up to and including this year. Over the past 5 years of housing production, we've built an average of under 700,000 single and multifamily homes total per year, with an average obsolescence rate of approximately 300,000 per year. This compares to a need for new dwelling units per year of between 1.2 million and 1.5 million.

This year, a significantly stronger year of building activity, we will produce approximately 950,000 single and multifamily dwellings, and again, will underserve the country's needs. We have more than absorbed the overbuilding of the early to mid-2000s, and have been underproducing for a protracted period of time. This shortfall will have to be made up, and the builders of both multi and single-family products have been pushing to increase production.


I think when you look at some of the economic indicators, housing starts are up, prices are up on housing. I think housing is a really important measure for us because we have a lot of jobs around that. A lot of contracting roofers, et cetera, around that. All of that is positive. And so we're feeling like we're coming off the end of the year with some momentum, and that will certainly help us.

I think there's reason to be very optimistic when you consider that demographic tailwind that will continue over the next 5 to 10 years, certainly. And then when you think about just the economy itself and you look at the strength of the balance sheets of consumers and corporations, the amount of liquidity out there, combined with the depth of the housing correction, I think there's a good argument we made that the housing cycle we're in right now will be strongest of the last 3 that we've seen.


Although we have seen recent improvements in the U.S. economy, growth is relatively light and confidence remains fragile. In addition, while the market generally feels better about the tail risk in Europe, the economy is challenged.

Given the continued uncertainty in the market, we are not managing the firm with the hope that the macro backdrop will improve. We are focused on managing through a continued difficult operating environment.

We continue to be very concerned about the prospects for the financial markets and the economies of North America and Western Europe, accentuated by potential weakness in China. There continues to be a big disconnect between the financial markets and the underlying economic fundamentals.
Markets are firming. If the economy continues to expand like it is, I think you'll see the banks loosen up. And if sort of rates go up a little bit but underwriting loosens up a bit, I think you'll see similar demand, if not more. That's why we're not troubled by a little uptick in interest rates right now.

The situation in Europe is not even slightly better. It's probably slightly worse. Even if we do not have a Greece event, if you will, the environment is moving from an economic standpoint to recession. And so the mood with our clients over there is still to be thoughtful and to be very mindful about the way they invest. And when clients are thoughtful and mindful, they tend to wait a little bit more and to think further on when and how much they're going to invest. 

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"I think the whole thing about the 2% extra payroll tax wasn't helpful. Don't forget, in America, the average household makes $50,000. 2% is $1,000 a year. I mean, after tax, that's a hurt in their pocketbook. Gas prices have been going up. I -- and you've seen the retailer results, the Walmarts, Kmarts, Targets, Costcos of the world had, had results less than they expected, not very good. So it's weak. I don't think it's -- I'm not ready to declare it's a permanent decline or a second dip on the recession there, but it's a little nervous as far as what's going on up there."

Photo: YouTube.com


We're really proud now that the [government budget] deficit could only be $600 billion in the year, and while that's encouraging, it doesn't do anything to fix the long-term problem, and the long-term problem is entitlements. If you take a look at the Medicare and Medicaid in particular and some on Social Security that while debt as a percent of GDP is we'll say around 75% today and under the new estimate grows to 83% by the end of the decade ... You take those same numbers, go up to the next decade and it goes to 135% debt as a percentage of GDP largely driven by the baby boomer generation retiring which no politician, Republican or Democrat, really wants to talk about. They're more than willing to say we got to reform entitlements but as soon as you say well, like what, that's when they all start to back off because they don't want to anger the voters.

I think there's a lot of concern about central banks not just in the U.S., China elsewhere, and maybe they stretched themselves out, and they played this maybe game, you want to call it for quite a while and maybe they are getting a brick wall, and the days of easy and free money may be coming to an end or at least maybe tapering off. But it probably wouldn't be good [for the global economy in the short-term], maybe good for long-term because then it would be more based upon fundamentals rather than speed injections.

Photo: Park Electrochemical

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