Fed official says taper decision could have waited

Lone dissenter wants the central bank to wait until March before move to trim bond-buying

PUBLISHED : Monday, 23 December, 2013, 4:47am
UPDATED : Monday, 23 December, 2013, 5:50am

The lone dissenter last week on the Federal Reserve's landmark decision to begin to pare its massive bond-buying programme said he would have preferred to wait until March to be sure the recovery is on a firm footing.

But Eric Rosengren, president of the Federal Reserve Bank of Boston, who cast his first dissenting vote since 2007 on Wednesday, still believes the economy will improve and the Fed will end the bond-buying sometime late in 2014.

"My hope and expectation was that by the March [Fed meeting], we would have accumulated enough data that we would have been pretty confident that we were going to get the 3 per cent growth" needed to boost jobs and inflation, Rosengren said.

"My hope is that we still get an outcome that is consistent with what I think our dual mandate is, which is to try to get to full employment and our 2 per cent inflation as quickly as possible."

The Fed on Wednesday began dialling down an unprecedented era of easy money, saying the economy in the United States was finally strong enough for it to start to trim the pace of its monthly asset purchases, by US$10 billion to US$75 billion, and suggest the programme could be wound down completely before the end of 2014.

"That seems like a reasonable expectation at this time," Rosengren said of Fed chairman Ben Bernanke's timetable for the winddown. "This really was a dissent over the timing of the decision."

The buying programme is the third such effort since the financial crisis. The bond-buying, known as quantitative easing, has cumulatively swollen the Fed's balance sheet to nearly US$4 trillion.

Nearly all economists polled now expect the Fed to continue to pare its bond-buying throughout 2014 until it is completely wound down before the start of 2015.

But Rosengren, long one of the Fed's most dovish officials, expressed discomfort with what he called a "premature" start to scaling back the asset purchases. Fed officials had been overly optimistic about growth and inflation throughout the recovery, he said, and there was a risk that current forecasts would also fall short.

The Commerce Department on Friday revised up its estimate on third-quarter growth to a 4.1 per cent annual rate, the fastest pace since the fourth quarter of 2011. It had previously reported gross domestic product growth of 3.6 per cent.

The Fed's next policy meeting is at the end of January, the last to be headed by Bernanke before his term expires on January 31.

Janet Yellen, the current vice-chair and a leading advocate of the Fed's aggressive steps to boost the economy, clinched a key procedural vote in the Senate on Friday that clears the way for her to take the reins from Bernanke.

"I have a high degree of confidence that Janet will try to do what's appropriate," Rosengren said.

In language that Yellen helped craft, the Fed this week tempered its decision to cut bond-buying with assurances that borrowing costs would stay low even longer than previously promised.

The Fed has held overnight interest rates near zero since late 2008, and policymakers said on Wednesday that they would keep rates there "well past the time" that the jobless rate fell below 6.5 per cent, especially if inflation expectations remained below the Fed's 2 per cent target.

Rosengren said on Friday that he strongly supported the new forward guidance on low rates.

Rosengren last dissented in 2007, arguing at the Fed's final meeting of that year that the central bank should cut rates more aggressively than the quarter-percentage-point reduction ultimately undertaken.

US unemployment was 7 per cent last month, down from the 10 per cent high in the recession, but still above the 5.2 to 6 per cent that Fed officials see as a level the economy can sustain without sparking inflation.