Federal Reserve Bank of St. Louis President James Bullard is ready to start slowing the pace of central bank bond buying as soon as his colleagues are, worried in part that the purchases risk overheating the gangbusters housing market.
“I think with the economy growing at 7% and the pandemic coming under better and better control, I think the time is right to pull back emergency measures,” Mr. Bullard said Monday in an interview with The Wall Street Journal.
When it comes to the outlook for the Fed paring its purchases of Treasury and mortgage bonds, “we do want to do it gently and carefully, but I think we’re in a very good position to start a taper. I don’t need to get going tomorrow, but I think we’re—I think we’re in very good shape for this” once the collective membership of the Federal Open Market Committee is ready to act, Mr. Bullard said.
Some $40 billion a month of the purchases target mortgage backed bonds. Some Fed officials have openly questioned continuing those purchases given the strength of the housing market, and some are ready to start paring the asset buying.
Mr. Bullard does not believe the housing sector is in a bubble and wants to ensure it stays out of trouble.
“I am a little bit concerned that we’re feeding into an incipient housing bubble,” he said. “We did get into a lot of trouble with a housing bubble in the mid-2000s and it—and it caused a lot of damage to the economy, so I don’t think we need to be feeding that here given the situation.”
“What we found out from that era was that housing prices can fall nationally and it does have big consequences for the macroeconomy,” Mr. Bullard added, noting that when it comes to the housing market, “we don’t need to, you know, push that any harder than it’s already being pushed by markets.”
Mr. Bullard appeared open to acting more aggressively on paring back the mortgage buying but didn’t call for it explicitly. “I would just emphasize that easier financial conditions are expected to move through interest-sensitive sectors, and housing is one of the biggest interest-sensitive sectors,” he said, flagging the collective impact of the central bank asset buying.
Some at the Fed, notably New York Fed President John Williams, have played down a direct link between the central bank’s mortgage bond buying and housing in favor of looking at how both types of purchases help financial conditions support growth.
Mr. Williams said Monday that mortgage bond buying lowers housing borrowing costs “on the margin,” and that he is focused more on the broad impact of buying both types of securities. Mr. Williams also said he believes the job market hasn’t yet improved enough for the Fed to reduce its asset buying.
Mr. Bullard, who is not a voting member of the rate setting FOMC this year, reiterated that based on the evidence the job market is tight and has met, or soon will meet, the Fed’s thresholds for trimming the purchases.
“I just don’t think we’re going to have any trouble at all meeting the substantial further progress” threshold laid out by the FOMC, he said. “If you don’t think it’s good enough today, it will be by the end of the year.”
Mr. Bullard also said he expects that inflation, as measured by the personal-consumption expenditures price index stripped of food and energy costs, will rise to 3% this year, followed by a 2.5% increase next year. He said this would be a good outcome because the Fed aims for inflation of above 2% to make up for when inflation was below that target.
The St. Louis Fed leader also said the big drop in bond yields over recent days was a “bullish” development for the economic outlook, noting it “makes me comfortable with the idea that the economy will continue to grow very robustly through the second half of this year, and go through the first half of 2022, and all of 2022.”
Mr. Bullard also reiterated that he doesn’t expect the Fed to raise the federal-funds rate target range, now near zero, until late 2022. The Fed has used its Treasury and mortgage bond buying to augment the stimulative power of its rock bottom short-term rate policy.
Write to Michael S. Derby at michael.derby@wsj.com
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Fed’s Bullard: Time Is Right to Pull Back on Central Bank Stimulus - The Wall Street Journal
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