Two policymakers involved in the Federal Reserve’s surprise decision this week to stand pat on its massive bond buying program aired different readings of the event in remarks Friday.
Both focused on the sharp reaction in financial markets after the Fed’s decision Wednesday.
Financial markets had spent the summer adjusting in anticipation of the Fed easing the pace of its purchases, which are aimed at supporting the economy and job market. When it did not, stock indexes jumped to record levels and interest rates on bonds fell sharply.
St. Louis Federal Reserve Bank president James Bullard said he was dismayed that markets were surprised by the Fed’s decision, although he also said a cutback could come at the next Fed meeting Oct. 29-30.
Esther George, his counterpart at the Federal Reserve Bank of Kansas City, saw the quick turn in financial markets as evidence of a missed opportunity that may hurt future Fed efforts.
“Costly steps had been taken to begin to prepare markets for an adjustment in the pace of asset purchases,” said George, the only voting Fed member to dissent Wednesday.
Those costly steps included this summer’s climb in interest rates, which began to cool the recovery in the housing market. The Fed’s bond purchases help hold down long-term rates, but the market drove rates higher after the Fed began to signal in May it would reduce its bond purchases sometime this year.
“Clearly the actions at this meeting, and the expectations that had been set relative to how markets were thinking about this, created confusion, created a disconnect,” George said, according to Bloomberg News.
Ahead of the meeting, George had said that reducing the bond purchases would disturb markets but that the damage could be reduced by starting this month and moving slowly.
The damage, she said, may be to the Fed’s ability to carry out changes in the future.
“Signaling future policy and then failing to follow through could erode the policy intent,” George said. “Asking the markets to trust forward guidance is going to require a great deal of credibility.”
George spoke in New York to the Shadow Open Market Committee, a group of economists that critique Fed policy decisions.
Bullard, who voted for the decision Wednesday, also was in New York for a speech and talked about the Fed’s decision in interviews with Bloomberg TV and Bloomberg News.
“I’m a little dismayed at those in markets that are saying they’re surprised by this,” Bullard said, adding that the Fed had tied cuts in its purchases to gains in the economy.
He said the decision to maintain the current pace of bond purchases was “a borderline decision” that came in reaction to recently weaker economic reports.
“Rates went up a lot over the summer” and “for many on the committee that was a surprise,” Bullard said. It wasn’t a “surprise for me because I’ve said the flow of QE (quantitative easing) matters a lot.”
Bullard said the Fed’s policy group may decide differently in October after it has seen the September job report and other updates.
Economist David Rosenberg at Gluskin Sheff wrote Thursday that given the Fed’s unwillingness to taper Wednesday, “it’s a legitimate question to ask what sort of environment it would take.”
He said the Fed’s bond buying is having “near zero economic impact” but carries risks. Past aggressive polices “gave investors reasons to party for a few years but did not end well, as we know with hindsight.”