Fed’s Plan to Taper Stimulus Effort Is Not Expected Until Next Year
By BINYAMIN APPELBAUM
Published: December 8, 2013
WASHINGTON — Federal Reserve officials are in no hurry to retreat from their bond-buying campaign to stimulate the economy and are likely to postpone any cuts to the program until next year, according to public statements by Fed officials and interviews with some of them.
Job growth has strengthened in recent months, and Fed officials expect continued improvement in the coming year. The Fed’s chairman, Ben S. Bernanke, predicted in June that the Fed would taper its purchases by the end of this year, and officials say they still could announce such a cut next week, when the Fed’s policy-making committee is scheduled to hold its final meeting of the year.
But influential Fed officials see little harm in postponing the decision, particularly compared with the risks of pulling back too soon. Significant details of the eventual retreat also remain the subjects of unresolved debates, according to the public statements and interviews. And some officials argue that the slow pace of inflation is itself a reason for the Fed to maintain its stimulus campaign.
“Everything else equal, I would like to see a couple of months of good numbers,” Charles L. Evans, president of the Federal Reserve Bank of Chicago, told Reuters on Friday, referring to the relatively strong jobs numbers in November.
Mr. Evans added that he was “certainly nervous” about the sluggish pace of inflation. Rising prices can help stimulate the economy, making it easier for companies to increase profits and for borrowers to repay debts. Inflation also encourages people and businesses to borrow more money and to spend it more quickly.
Low inflation reduces those incentives. It also means the economy is closer to deflation, or a general decline in prices, which has the opposite effect: freezing economic activity by discouraging both borrowing and spending.
Since January, the Fed has added $85 billion a month to its holdings of Treasury and mortgage-backed securities as part of a broader campaign to reduce borrowing costs for businesses and consumers and encourage risk-taking by investors.
Mr. Bernanke and his allies have repeatedly described the program as a safe and effective way to generate a little more economic activity at a time when the nation’s primary economic problem is that millions of Americans cannot find jobs.
Almost from the outset, however, internal and external critics have questioned whether the bond purchases are helping the broader economy or merely enriching investors. And they have warned that the Fed’s outsize role in financial markets is disrupting normal activity and may be encouraging excessive speculation.
In the face of those doubts, the Fed has appeared to play for time, repeatedly indicating that it is getting ready to pull back even as a strong majority of its policy-making committee has voted to extend the campaign at each meeting this year.
William C. Dudley, the president of the Federal Reserve Bank of New York and a key supporter of the bond purchase program, reflected the caution of this majority in a November speech in which he said, “I have to admit that I am getting more hopeful” given the recent improvement in economic data.
“I hope that this marks a turning point for the economy,” Mr. Dudley said. But he continued, “We have seen such bursts in payroll growth before over the past few years and have been disappointed when the pickups proved temporary.”
Officials including Mr. Dudley and Janet L. Yellen, the Fed’s vice chairwoman — whom the Senate is likely to confirm as Mr. Bernanke’s successor later this month — see recent job growth as outstripping the moderate pace of economic growth.
“The Yellen/Dudley prescription holds that it will take strong G.D.P. growth to convince them that these employment gains will continue,” wrote Vincent Reinhart, a former head of the Fed’s monetary policy staff and now the chief United States economist at Morgan Stanley. “We think the committee will use the December meeting to agree on a plan” most likely to be put into effect in March.
Agreeing on a plan also will take some work. The Fed wants to convince investors that tapering would not alter what it views as the centerpiece of its economic stimulus campaign, its commitment to hold short-term interest rates near zero. It has said that it will keep rates near zero at least as long as the unemployment rate remains above 6.5 percent, and probably quite a bit longer. The rate in November was 7 percent.
When Mr. Bernanke first described the Fed’s tapering plans in June, investors ignored this distinction, driving up rates across the board. But the message has gradually taken hold. The movement of asset prices after recent good news, including the November jobs data, has reflected an expectation that the Fed is closer to tapering, but not to raising interest rates. “Markets are beginning to appreciate that they are separate tools,” Mr. Bernanke said last month.
Some officials think the Fed still needs to underscore this distinction when it begins to taper its bond purchases. Others now regard such an effort as unnecessary, or contend that the Fed could act after it begins to taper if investors seem to be confused.
Proponents of underscoring the Fed’s commitment to low interest rates are further fragmented about the best technique. Some, including Mr. Evans, would like to lower the threshold unemployment rate. Some would like to create a similar threshold for inflation. Some would like to make a symbolic cut in an obscure interest rate the Fed pays on bank reserves.
Instead of such concrete steps, the Fed also could seek to explain in greater detail how it will decide the timetable for increasing interest rates. This option commanded the broadest support at the Fed’s meeting in October.
A shift among officials who pushed for tapering earlier in the year has made it easier for the Fed to postpone decisions. Some of those officials now say the Fed should commit to a date to end the program rather than beginning to taper as soon as possible, because they see this as the best way to reduce confusion among investors.
“The sooner we say we’re going to end this program once we’ve purchased X, the sooner we say that, the better,” Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, said on Friday. “It’s that constant uncertainty about what we’ll do at each and every meeting that I think we can eliminate this way, and we’ll be better off for it, and we’ll not sacrifice much of the benefits of the program.”
The sluggish pace of inflation also has made it easier to wait. Prices rose just 0.7 percent during the 12 months that ended in October, the Commerce Department reported on Friday. Excluding the volatile movements of food and energy prices, inflation was still just 1.1 percent over that period. That is significantly below the 2 percent pace the Fed regards as best for the economy.
James Bullard, the president of the Federal Reserve Bank of St. Louis, dissented from the Fed’s policy statement at the Fed’s June meeting because he said that the central bank should signal more strongly its determination to increase the pace of inflation. He said last month that he remained concerned, in part because he did not understand why inflation was falling despite the Fed’s enormous stimulus campaign.
“We don’t have a good story about why this is,” Mr. Bullard said at a Chicago conference. “You would have expected to see more inflation pressure by this point. We haven’t seen it. That’s what makes me worried more than anything.”
The Fed forecasts that inflation will rebound, and investors appear to share that expectation. But some Fed officials, including Mr. Bullard, are reluctant to taper before seeing those expectations edge closer to reality.