Fed officials suggest possible end to asset purchases

By Ann Saphir and Alister Bull ,Reuters

SAN DIEGO — The Federal Reserve could halt its asset purchases this year, two top Fed officials suggested on Friday, a view also gaining traction among economists at Wall Street’s top financial institutions. St. Louis Fed President James Bullard, a voting member of the Fed’s monetary policy panel in 2013, said a drop in the unemployment rate to 7.1 percent would probably constitute the “substantial improvement” in the labor market that the central bank seeks. That’s the bar for the Fed’s policy-setting committee to halt the current round of asset purchases that it began in September. The Fed is currently buying US$40 billion in mortgage-backed securities and US$45 billion in Treasuries each month in a bid to push down borrowing costs and spark faster growth. “If we get even moderately good growth this year I would expect unemployment to continue to tick down,” Bullard later told reporters. “I would say that that would put the committee in a good position to think about doing a pause with the balance sheet policy.”

Bullard also acknowledged that he had a more optimistic view on unemployment than some other Fed officials, and sees it in the “low 7’s” by year-end. Thousands of economists have gathered in San Diego for the annual American Economic Association meeting, drawing some of the biggest names in the profession as well as top policymakers. Bullard stressed that the Fed would decide about changing its bond-buying program on the basis of the outlook for the labor market, and said that if it decided to pause, and then saw conditions weaken, it might resume the purchases.

The Fed has also promised to keep interest rates at their current near-zero level until unemployment drops to 6.5 percent, as long as inflation does not threaten to rise above 2.5 percent.

Philadelphia Fed Bank President Charles Plosser, who spoke separately at the conference, said he expects unemployment to drop to between 6.8 percent and 7.0 percent by the end of 2013. As a result, he hopes the Fed will stop buying bonds before the 6.5 percent threshold, implying he anticipates the asset purchases could halt this year. Unemployment registered 7.8 percent last month. Economists at nine of 16 primary dealers — the large financial institutions that do business directly with the Fed — told Reuters on Friday they expect the Fed to end its Treasuries purchases in 2013.

Fed policymakers are increasingly concerned about the impact of their monthly purchases, which currently total US$85 billion. Minutes from their December policy meeting showed that “several” top officials expected to slow or stop the so-called quantitative easing program, dubbed QE3, “well before” the end of the year — news that surprised some on Wall Street and prompted a drop in stocks and bonds, and a rise in the dollar.