By Steven K. Beckner
(MaceNews) – St. Louis Federal Reserve Bank President James Bullard was upbeat about the economic outlook Thursday, but said he is not ready to start considering any scaling back of the Fed’s ultra-easy monetary policy.
He told reporters he is not concerned about the recent spike in bond yields and does not see them posing an economic “headwind.”
Bullard, not a voting member of the Fed’s rate-setting Federal Open Market Committee this year, projected that strong 2021 GDP growth should reduce the unemployment rate to 4 ½% by year’s end and said other labor market metrics, such as labor force participation should also improve.
But he made clear he is in no hurry to reduce the pace of asset purchases or raise the federal funds rate after earlier telling a Georgia State University webinar that he believes the U.S. economy is in a long-run era of low inflation, low potential growth and low interest rates.
Speculation has mounted in financial markets that the FOMC will begin tapering the Fed’s $120 billion monthly securities purchases sooner than previously expected, but Bullard gave that little credence.
Echoing the FOMC’s statement that it needs to see “substantial further progress” toward its goals of “maximum employment” and average 2% inflation, Bullard said he wants to see those goals realized, not merely forecast – something which Fed Chairman Jerome Powell emphasized in Wednesday Congressional testimony.
“I gave a rosy outlook, but it’s only an outlook,” Bullard said. “I would definitely want to see if this materializes or not before getting into any adjustment to policy.”
Bullard said he agrees with Powell that the FOMC should “start that conversation (about tapering) only when it’s appropriate and not get ahead of ourselves,” even though he said the Fed has “high hopes” that the pandemic will “come to an end” and lead to faster growth.”
“We’re going to need to see further progress before we start that conversation,” he went on. “It’s too early to speculate” on when the FOMC will have enough evidence to start seriously discussing scaling back bond buying.
Bullard was speaking on a day when the 10-year note yield climbed to 1.46% – up from
0.9170% at the start of the year and as low as 0.3980% last March. But, like many of his colleagues, he said, “I think that rising yields are probably a good sign so far because it does reflect a better outlook for U.S. economic growth and inflation expectations which are closer to the Committee’s inflation target….”
“So far so good,” he added.
Asked if there was a point at which rising bond yields could “overshoot” and undermine recovery, Bullard conceded, “that sometimes happens, but I don’t think we’re at that kind of juncture at this point.”
He said “the pre-pandemic level of rates would be one benchmark, but we’re not even at that level yet..”
Earlier, in prepared remarks, Bullard noted that market-based inflation expectations have recovered from lows reached in March 2020. He said TIPS-based breakeven inflation could move considerably higher and still be consistent with an inflation outcome (based on the personal consumption expenditures price index) modestly above the Fed’s 2% inflation target.
“This would be a welcome development for the FOMC, as inflation has generally been below target for many years,” Bullard said.