Feds Bullard urges start of bond taper with jobs goals met

"I think we are in a situation where we can taper," Bullard said Thursday during a Bloomberg Television interview with Michael McKee. "We don't want to jar markets or anything -- but I think it is time to end these emergency measures."

Fed officials are considering how quickly to trim monetary policy support for the economy as it reopens from pandemic lockdown. Consumer prices have risen sharply amid supply glitches, but the central bank has argued for patience.

Chair Jerome Powell, beginning two days of congressional testimony, said Wednesday that the U.S. economic recovery still hasn't progressed enough to start reducing the $120 billion monthly pace of its asset purchases. He will appear before the Senate Banking Committee at 9:30 a.m. in Washington.

"On the labor market I think we have made substantial progress," Bullard said, using the phrase policymakers have used as a benchmark for tapering. As for whether to pull forward the move into the fourth quarter, "The committee is going to debate that in earnest now at the July meeting."

The Federal Open Market Committee will meet July 27-28 to discuss the economic outlook and its plans on the appropriate timing of scaling back its asset purchases. The committee wants to achieve "substantial further progress" on inflation and employment before tapering its $80 billion a month of Treasury purchases and $40 billion of mortgage-backed securities.

"The pandemic is coming under very sharp control here," Bullard said. "You've got bottlenecks and shortages everywhere."

Bullard, who next votes on monetary policy in 2022, has sometimes been viewed as a bellwether for the FOMC and was the first to push for a second round of asset purchases coming out of the 2007-2009 recession. The committee eventually adopted that.

Even if the FOMC agrees to taper, there are multiple issues to discuss, Bullard noted, including when to start the process, whether to reduce buying of MBS first rather than Treasuries, the pace of tapering and the possibility of adjusting that tempo in response to data.

Bullard said he expected progress on employment to continue at a rapid pace. He said new variants of the virus, while being monitored as a risk, don't change the outlook for a continued decline in deaths from Covid-19.

U.S. employers added 850,000 jobs last month, increasing by the most since August. At the same time, labor shortages continue to trouble some employers and U.S. payrolls are still nearly 7 million below their pre-pandemic level.

After the taper begins, the FOMC needs to be prepared to speed up reductions in response to incoming data if necessary, Bullard said. For now, market measures of inflation expectations suggest investors are confident in the Fed, he said.

"You probably don't want to be on automatic pilot in this situation," Bullard said. "We are not quite sure where this inflation process is going to go. We need some optionality on the upside with respect to possible inflation shocks."

The consumer price index in June rose by the most since 2008, increasing 5.4% compared with a year earlier. Fed officials argue that the increase is largely due to transitory factors associated with supply-chain bottlenecks and the reopening of service industries as the pandemic recedes.