Presidents’ comments point that it is likely.
By American Bazaar Staff
WASHINGTON, DC: Will the Federal Reserve go back on last week’s comments on the stimulus package? While there is no indication to the effect immediately, comments by two Fed presidents’ on Monday provide solace to those who are clamoring for the continuance of the bond buying program.
On Tuesday morning in Asia, there were signs of hope that the Fed will not stop its planned bond buying program toward the end of this year, as gold edged up and the dollar weakened in Singapore. However, the Fed is in a predicament since the asset purchases have already reached $3.47 trillion since 2008.
The major stock market index in the U.S., the S&P 500, suffered more than 4.5 percent loss after Chairman Ben Bernanke said on June 18 that it will start cutting down its $85 billion monthly bond buying program later this year and close it by mid-next year once the U.S. economy achieves its targets.
However, on Monday, Federal Reserve Bank of Dallas president Richard Fisher and Minneapolis Federal Reserve president Narayana Kocherlakota differed from Bernanke and wanted monetary policy to be accommodative. Interestingly, both these presidents were critical of extending stimulus in 2011 and recorded dissents against two resolutions pushed by the FOMC.
However, the two changed their views in the subsequent year in September. Kocherlakota cited lower inflation and research, suggesting that high jobless rate is due to economic sluggishness and not due to structural changes in job market. But, reports indicated last year that it was structural issues that were responsible for the jobless claims.
Fisher, who was more vociferous in criticizing the Fed’s accommodative policy earlier, however, defended Bernanke’s comments of tapering the bond buying program if the economy progresses to the Fed’s expectations.
The U.S. Federal Reserve president has been consistent in saying that the stimulus will continue as long as the economy needs it. However, June 18th was the first time that Bernanke had revealed the Fed’s intention to start tapering of bond purchase.
Even in the current assessment of the Fed, it had only stated that it will stop buying bond if the economy makes progress. However, William Dudley, the New York Federal Reserve president, opined that the Fed was too optimistic about the economy. He told media recently that previous forecasts of the Fed were missed.
There is also strong opinion among U.S. economists that despite the easy money policy, economic recovery is weaker than expected. Aside from this, employment and inflation targets were also not met.
Therefore, based on the comments made by the Federal Reserve presidents and Bernanke, it is likely that tapering of bond purchase could be delayed if the economy fails to make the kind of progress that the Fed expects.