The Federal Reserve should stick to its guns and stop buying bonds this month as planned “unless something dramatic happens,” regardless of the carnage on financial markets last week, one of its top officials said Monday.
In an interview with the Financial Times, Boston Fed president Eric Rosengren took issue with comments made last week by James Bullard, his colleague on the Fed’s boad, who said it might be wiser to keep the Fed’s “quantitative easing” program going for a couple more months to stop market volatility derailing the recovery.
Fears that a slowdown in China and another recession in Europe could spill over into the U.S. economy made for a wild last week in financial markets, but data suggested that the U.S. continued to pick up momentum, as the week’s new jobless claims hit a 14-year low and other data suggested consumer confidence remained high. Market sentiment has become more fragile as the Fed prepares to take away the safety net of its constant liquidity injections, while new regulations have thinned out liquidity, making markets more susceptible to big swings.
Rosengren said the bond purchases, which have kept market interest rates at ultra-low levels ever since 2009, had achieved their purpose, and that it was more important to focus on what’s going on in the economy, rather than on Wall Street.
“There has been substantial improvement in labor markets,” Rosengren said. “As a result I would be pretty comfortable [ending purchases] at the end of the month.”
Rosengren also said that the Fed ought to prepare for its first rate hike since the 2008 crisis by removing from its monthly communications the phrase that rates would stay low for “a considerable time,” although he suggested that that key phrase could be left in this month’s statement as a sop to sentiment.
He pointed out that the Fed is now much closer to meeting the “full employment” part of its mandate than it expected to be when it adopted that ‘forward guidance’. The jobless rate stands at only 5.9%, less than one percentage point above the 5% level that has in the past been economists’ definition of full employment.
““I would like to tighten when we’re one year away from full employment,” in other words, some time in 2015, Rosengren said.
Elsewhere in the interview, he took a swipe at central banks in both Japan and the Eurozone for doing too little to keep inflation at around 2%, as their mandates tell them too. In a dig at Germany, whose representatives on the European Central Bank have put up most resistance to a more supportive policy, he said that “you have a hard time explaining why a credible 2% inflation target is consistent with 80-85 basis points on a 10-year yield.”
Germany’s 10-year borrowing costs fell to a new historic low of under 0.80% last week as investors sought safety from the turmoil in equity markets.