Bullard Optimistic on 2014, Against Lower Jobless Threshold

St Louis-MO (Nov 20)  Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, said he is optimistic about the outlook for 2014 and doesn’t favor lowering the unemployment threshold at which the central bank would consider raising interest rates.

“I think the right assessment of 2014 is still to be optimistic,” Bullard said at “The Year Ahead: 2014,” a two-day conference sponsored by Bloomberg LP in Chicago. “A lot of the drags affecting the U.S. economy are waning.”

Since December, the Federal Open Market Committee has said it would hold its target interest rate near zero “at least as long as” unemployment remained above 6.5 percent, so long as the outlook for inflation did not climb above 2.5 percent.

Minneapolis Fed President Narayana Kocherlakota has proposed lowering the unemployment rate threshold, saying that the Fed should hold rates low while joblessness remains above 5.5 percent.

Bullard said if the Fed were to lower the unemployment threshold, “then how much credibility do you have for the threshold?”

“That is what I would be most nervous about,” he said. “It might be a dangerous game to move thresholds around.”

Bullard has instead proposed adding new guidance that the Fed would not raise its benchmark interest rate if inflation were below 1.5 percent, an idea he repeated today.

Europe’s Recession

In the interview, Bullard said Europe seems to be coming out of a recession.

“That will help the global situation,” he said. “There are reasons to be optimistic.”

Bullard said “deleveraging among households” is waning and the housing market has improved in the last 18 months. “We could get 3 percent growth or stronger” next year, he said.

The Federal Open Market Committee plans to press on with $85 billion in monthly bond buying until seeing substantial improvement in the outlook for the labor market. While U.S. employers last month added 204,000 workers, the Fed probably won’t taper its purchases until a March 18-19 policy meeting, according to the median of 32 economist estimates in a Bloomberg News survey Nov. 8.

Bullard has forecast that U.S. economic growth will accelerate to 3 percent or more next year, while adding that policy makers shouldn’t rely too heavily on forecasts which have not been met the past several years. Retail sales in the U.S. rose 0.4 percent in October, a sign that consumer spending was resilient during the government shutdown, a Commerce Department report showed today.