Fed doesn’t have ‘unconditional optimism’ on economy, official says
WASHINGTON -- The Federal Reserve doesn’t have “unconditional optimism” about the economic recovery and won’t pull back on stimulus efforts if conditions don’t warrant it, a top central bank policymaker said Friday.
In prepared remarks to the Council on Foreign Relations, Fed Governor Jeremy C. Stein suggested that the central bank could begin tapering its $85 billion in monthly bond purchases at its September meeting.
But the central bank would move slowly and would be prepared to halt the tapering if the recovery did not appear to have enough momentum to get the unemployment rate down to the Fed’s goal of about 7% when the bond-buying would end next year, he said.
The unemployment rate was 8.1% when the latest round of bond purchases began last year.
“If the news is bad, and it is confirmed by further bad news in October and November, this would suggest that the 7% unemployment goal is likely to be further away, and the remainder of the program would be extended accordingly,” Stein said.
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His speech came after a flurry of comments Thursday by key Fed officials designed to calm financial markets.
Stocks plunged and long-term interest rates rose sharply after Fed Chairman Ben S. Bernanke said Wednesday that the Fed could begin slowing its stimulus efforts later this year and end the bond-buying completely next year if the economic recovery continued to strengthen.
Investors fear an end to the Fed’s easy-money policies, which have kept interest rates low and made stocks much more attractive.
Stein suggested that financial markets over-reacted to Bernanke’s comments and other recent statements by Fed officials that have caused mortgage rates to rise from their record lows over the past month.
Fed officials simply have clarified their policies, not made major changes in them, he said. Bernanke’s target of an unemployment rate of about a 7% as a trigger for ending the bond-buying program was “an effort to put more specificity around the heretofore less well-defined notion of ‘substantial progress,’” he said.
“I don’t in any way mean to say that the large market movements that we have seen in the past couple of weeks are inconsequential or can be dismissed as mere noise,” Stein said.
“My only point is that consumers and businesses who look to asset prices for clues about the future stance of monetary policy should take care not to over-interpret these movements,” he said. “We have attempted in recent weeks to provide more clarity about the nature of our policy reaction function, but I view the fundamentals of our underlying policy stance as broadly unchanged.”
On Friday, Stein referred to September as a hypothetical starting point for the stimulus wind-down. But many analysts have speculated the Open Market Committee could vote to begin reducing its bond purchases then, after Bernanke said in May that such a move could come in a few months.
Bernanke also is scheduled to hold his next quarterly news conference in September, and many Fed watchers believe that he would want to make a policy shift at such a time so he could explain the move and answer questions.
Dennis Lockhart, president of the Atlanta Fed, stressed Thursday that there was “no ‘predetermined’ pace of reductions in the asset purchases, nor is the stopping point fixed.”
Stein echoed that point Friday, saying Bernanke’s attempt to clarify how the Fed would begin pulling back on the stimulus was not a plan set in stone. The move would depend on continued improvement in the economy, he said.
“It is important to stress that this added clarity is not a statement of unconditional optimism, nor does it represent a departure from the basic data-dependent philosophy of the asset purchase program,” Stein said.
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