St. Louis Federal Reserve Bank President James Bullard said Tuesday he agrees with the decision to leave “considerable period” language in the latest policy statement, and next month is a more natural time to drop the phrase.
Bullard, speaking to reporters during a St. Louis Fed seminar on community banking, also said he continues to believe the first quarter of next year will be an appropriate time to begin raising interest rates.
The “considerable period” phrase in the monetary policy statement released Sept. 17 remains appropriate because the Fed has not yet ended its quantitative easing, or asset purchase, program, Bullard said.
“I thought it was probably premature to remove ‘considerable time’ from the statement because QE hasn’t ended yet,” he explained. “A more natural juncture would be the October meeting. I’m not sure what the committee is going to decide on that … It seems to me that the October meeting when QE is expected to end would be the right time to revisit this issue.”
Bullard has said previously he believes an interest-rate increase will be appropriate in the first quarter of next year, and he said recent economic data reinforces that belief.
“The data I’ve seen are basically on track with our projection that the end of the first quarter is a reasonable judgment” on when to act, he said. “It’s not a calendar-based policy; it depends on how the economy evolves. Our projections are for over 3% growth in the remainder of this year and over 3% again in 2015 … If that comes to pass I think the committee will agree that in the first half of 2015 will be an appropriate time.”
As the Fed approaches a decision to tighten monetary policy, Bullard said he hopes it will move less “mechanically” than it did between 2004 and 2006, when it increased the federal funds rate by regular quarter-point steps. He said he is worried that the wrong pace of tightening could allow new asset price bubbles to form.
“I do worry that our policies will foster asset price bubbles in coming years,” Bullard said. “I don’t think our current situation is enough to warrant reaction in monetary policy … but I am worried about some dynamic like that getting going, even as we start to tighten. If we go too slowly or too mechanically during that period we could foster asset price bubbles, because that is basically what happened during 2004 to 2006.”
He said future increases should be “more state contingent … If we see a weakness in the economy we might be able to take a pause, and we might also be able to make larger increases at some points. I would like to see it be more reactive to what’s going on in the economy instead of the steady march upward that we saw in 2004 to 2006.”
Bullard also said he supports a call by Kansas City Fed President Esther George to allow bank regulators more discretion in applying Dodd-Frank rules to community banks.
“As a macroeconomist what I worry about is are we choking off credit that would be perfectly good credit to have and limiting economic growth,” he said. “That would not be a good outcome to have from the perspective of macroeconomic policy.”