Low Inflation Means No Hurry to Taper Stimulus, Top Fed Official Says

A top Federal Reserve policymaker said Monday that low inflation means there is no hurry to reduce a key central bank stimulus program, which he said has made “substantial progress” in lowering unemployment.

James Bullard, president of the Federal Reserve Bank of St. Louis, said the Fed’s bond-buying program is a “very reasonable” effort to stimulate the economy, given that short-term interest rates are near zero.

And although he admitted the $85 billion in Treasury bonds and mortgage-backed securities the Fed has been buying since September 2012 is a “torrid pace” of purchases, the low level of inflation has eased his concerns about continuing the program.

“We’ve got low inflation. That’s why I’ve been willing to be patient about this,” Bullard told CNBC. “What’s your hurry? You don’t have to be in a big hurry.”

The government reported last week that the consumer price index, a key measure of inflation, rose just 1.2 percent for the 12 months ending in September. That is well below the Fed’s target of 2 percent annual inflation and its threshold of a 2.5 percent annual rate for tightening monetary policy.

Bullard is a voting member of the policymaking Federal Open Market Committee, which decided last week to continue the same pace of bond purchases. The committee does not meet again until December, and many analysts predict it will not decide to start tapering the purchases until the beginning of 2014 at the earliest.

Bullard would not predict when the Fed will begin reducing the purchases. He noted that the controversial program, which has helped swell the Fed’s holdings to nearly $4 trillion, has helped reduce the unemployment rate nearly a full percentage point since September 2012.

The unemployment rate was 7.2 percent in September. Economists project the rate will tick up to 7.3 percent when the government releases the October jobs report on Friday. They also project last month’s partial federal government shutdown will have reduced job growth to about 120,000.

Bullard said that each jobs report that shows improvement brings the Fed closer to reducing the stimulus program, though he added the effects of the shutdown will make it difficult to interpret October’s data.

“Every jobs report that continues to show more jobs being created and a tick down in the unemployment rate, is going to mean that the probability of a taper go up,” he said.

The Fed will analyze economic data to decide when the economy is strong enough to start reducing the stimulus, Bullard said.

He acknowledged concerns raised by some analysts and lawmakers over the fact that the Fed’s balance sheet continues to grow, raising risks of large losses on the central bank’s holdings if interest rates were to rise sharply.

But Bullard said the Fed’s balance sheet as a percentage of the U.S. economic output is below that of central banks in Japan, Europe and the United Kingdom, so there is still room to grow safely.

“I don’t want to take too much risk, but I think we’ve got some room to go on that,” he said.