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UPDATE 1-Fed's Bullard: need confidence job gains will stick before taper

Alister Bull
Friday, 1 Nov 2013 | 9:40 AM ET

ST. LOUIS, Nov 1 (Reuters) - The Federal Reserve wants reassurance that U.S. labor market improvements will be lasting before starting to scale back its massive bond buying campaign, a senior Fed official said on Friday.

"To the extent that key labor market indicators continue to show cumulative improvement, the likelihood of tapering asset purchases will continue to rise," St. Louis Federal Reserve President James Bullard said. "The Committee also wants reassurance that any progress made in labor markets will stick."

Bullard voted to maintain asset purchases at a $85 billion monthly pace when the Federal Open Market Committee met earlier this week, following a spate of softer readings on the U.S. economy after budget battles in Washington dented business and consumer confidence.

Economists now think the Fed will wait until 2014 before starting to wind down asset purchases, although a clear improvement in economic indicators in the next two months could revive prospects for action at the Fed's December meeting.

Bullard, who dissented against the Fed's June decision to lay out a plan to scale back bond buying because of very low inflation, gave no clear hint on when he would support slowing the purchase pace.

He noted the jobless rate and payroll employment had picked up, but also argued other labor market measures were still soft.

Even once tapering gets underway, the Fed's monetary policy will still be very stimulative for growth, Bullard said, provided it can convince financial markets that its forward guidance on interest rates remain intact. But he acknowledged that this might be tough.

The Fed has quadrupled the size of its balance sheet to $3.8 trillion through bond buying and kept interest rates near zero since late 2008. It has also promised to hold rates ultra-low at least until unemployment hits 6.5 percent, provided the outlook for inflation remains under 2.5 percent.

Annual consumer price inflation was just 1.2 percent in September and the jobless rate was 7.2 percent.

The Fed argues that reducing bond buying will not alter its commitment to keep rates near zero, and a majority of officials forecast the first rate hike will not happen until 2015.

But financial markets have reacted sharply when the Fed has talked about changing the pace of buying, and Bullard said it was going to be challenging to sever that relationship.

"The Committee needs to either convince markets that the two tools are separate, or learn to live with the joint effects of tapering on both the pace of asset purchases and the perception of future policy rates," Bullard said.