Charles L. Evans, the president of the Federal Reserve Bank of Chicago, said he would not rule out the possibility that the Fed could start tapering as early as next month.
The remarks came at a breakfast with reporters in Chicago and echoed through the markets during the day, because Mr. Evans is a voting member of the Federal Open Market Committee, which sets Fed policy, and because he has generally supported more aggressive efforts to stimulate the economy in the past.
In a separate interview with Market News International, the president of the Federal Reserve Bank of Atlanta, Dennis P. Lockhart, also indicated a September move was an option. Mr. Lockhart is not a voting member of the committee, however, so his comments carry a bit less weight than those of Mr. Evans.
On Wall Street, which has benefited from the Fed’s accommodative stance, stocks dropped after the comments, and major market indexes closed lower by a little more than half a percentage point.
The Fed and its chairman, Ben S. Bernanke, have signaled that the central bank’s policy of buying $85 billion a month in government bonds and mortgage-backed securities will be wound down if the economy improves further and unemployment continues to fall.
Mr. Bernanke has said he envisions the stimulus program coming to an end by the middle of next year if unemployment falls to about 7 percent. Last Friday, the Labor Department reported that unemployment in July fell to 7.4 percent, from 7.6 percent in June.
Mr. Bernanke has not said, however, when the tapering will begin, only that the speed and timing of any easing is contingent upon continued signs of strength in the economy.
Traders and economists expect bond purchases to be reduced before the end of 2013, but opinion is divided about whether that will start as early as next month or come as late as December.
The Fed’s ultimate decision will have wide-reaching impact. The Fed’s aggressive bond buying has helped keep long-term interests rates low; mortgage rates have risen by roughly a full percentage point since Mr. Bernanke first raised the possibility of tapering in May. In addition, the stimulus has also helped prop up the big rally on Wall Street.
While the remarks by Mr. Evans and Mr. Lockhart on Tuesday did not resolve the debate, their tone suggested that tapering was indeed on the horizon if the economy held up.
“Adjustments to asset purchases are going to be conditional on our outlook materializing,” Mr. Evans said. “It’s going to be data-dependent.”
“I do expect though that the outlook will materialize, and we are quite likely to reduce the flow purchase rate starting later this year — couldn’t tell you which month that will be — and it’s likely to wind down, over time, in a couple or a few stages,” he said.
In terms of September, Mr. Evans said, “I clearly would not rule it out, it’s going to depend on the data — the data have been not so bad.”
For his part, Mr. Lockhart, the Atlanta Fed president, also said there was plenty of wiggle room for the central bank, depending on how economic growth shaped up over the coming months.
If growth turns out to be weaker than expected, he said, a reduction in stimulus efforts could be put off.
“If we see a deterioration from this point, and I would say my more realistic fear is just a kind of ambiguous picture of mixed data that signal neither accelerating strength nor necessarily deterioration, but that kind of moping along in the middle, then I think it’s not a foregone conclusion that the asset purchase program should be removed or removed rapidly,” he said.
Dean Maki, chief United States economist at Barclays, said: “Neither Fed president was willing to commit to September nor rule it out. What this is telling us is the F.O.M.C. is keeping its options open and awaiting further data.”
Article source: http://www.nytimes.com/2013/08/07/business/economy/2-fed-presidents-hint-tapering-of-stimulus-could-begin-next-month.html?partner=rss&emc=rss