Regional Fed president hints at early taper

James Bullard, president of the Federal Reserve Bank of St. Louis, opened up the possibility of a small reduction in the Fed's bond-buying program, another sign the central bank may soon shrink its 15-month-old monetary stimulus.

Speaking at the CFA Society of St. Louis on Monday, Bullard said an improving job market could let the Fed slow down its program of buying $85 billion in long-term bonds every month. Employers have added more jobs than economists expected since the program was announced in September 2012, and the unemployment rate, now 7%, has fallen twice as fast as was then forecast, he said.

The program stimulates the economy by keeping long-term interest rates low — letting homeowners and businesses refinance debt and fund new purchases more cheaply. When Fed Chairman Ben Bernanke first said in May that the central bank might slow bond buying, mortgage rates rose more than a percentage point, curtailing momentum in home sales. The Fed then decided in September not to "taper" immediately, a position that has softened after strong jobs reports for October and November.

"Based on labor market data alone, the probability of a reduction in the pace of asset purchases has increased," Bullard said.

Bullard's hints are consistent with other signs that the Fed is preparing to slow its purchases — if not at its Dec. 17-18 meeting, then early in 2014. Several top officials have made similar speeches, and Monday's remarks are likely to be the last before the central bank imposes its traditional pre-meeting news blackout.

Richmond Federal Reserve Bank President Jeffrey Lacker and Dallas Fed President Richard Fisher also said they think the central bank will soon consider a taper. Unlike Bullard, neither has a vote this year on the rate-setting Federal Open Market Committee, or FOMC.

"When the FOMC meets next week, I expect discussion about the possibility of reducing the pace of asset purchases,'' Lacker said in a speech to the Charlotte Chamber of Commerce. "The ! key issue, in my view, is the extent to which the benefits of further monetary stimulus are likely to outweigh the costs.''

Lacker, along with congressional critics, has argued in the past that the Fed's purchases raised risks of inflation, although the consumer price index has gained just 1% the past 12 months, half of the central bank's target 2% inflation rate. One reason the taper has continued has been Fed leaders' fear of inflation running too low.

"There is no widely accepted reason why inflation is running as low as it is in the face of extraordinarily accommodative policy from the Fed," Bullard said. "Should inflation not (rise) toward target, the committee could pause tapering at subsequent meetings."

The stock market did some tapering of its own on Monday after Bullard's speech. The Dow Jones Industrial Average was clinging to modest gains a half-hour before the closing bell. The Dow closed at 16,025.53, up 5.33, down about 33 points from its intraday high.