Bullard Says Delay End of QE: Markets U-Turn

U.S. equity markets on Thursday made a sharp u-turn after St. Louis Federal Reserve President James Bullard suggested the central bank should delay ending its bond purchase program known as quantitative easing.

Bullard, in comments to Bloomberg News, said delaying the end of its monetary stimulus program would help keep inflation rates at a level closer to the Fed’s target rate of 2%.

Inflation has been running well below the Fed’s target rate for months, and expectations for its trajectory have declined in recent weeks, particularly as the U.S. dollar has shown signs of strengthening.

“Inflation expectations are declining in the U.S.,” Bullard said. “That’s an important consideration for a central bank. And for that reason I think that a logical policy response at this juncture may be to delay the end of the QE.”

Bullard's comments came shortly after 10 a.m. ET when the Dow Jones Industrial Average was down about 170 points. The index promptly reversed course and traded down 30 points less than an hour later. It was 66 points lower, or 0.41% at 16,077 at 11 a.m. ET.

Some analysts were skeptical Bullard’s comments would have a long-term effect on the markets, which have lost their 2014 gains in recent weeks on a range of global fears including a slowdown in global growth, falling oil prices, a strong dollar, the Ebola outbreak and escalating violence in the Middle East.

“I don't think this feeble attempt at pandering to a market not even 10% from highs set a month ago will be rewarded. I could be wrong and it will work again, but I think the market sentiment towards the Fed has changed,” Peter Tchir of Brean Capital LLC said.

The Fed has all-but promised to end its bond purchases this month at its next meeting scheduled for October 28 and 29. The central bank has been shaving $10 billion each month from its purchases since December as the unemployment rate has fallen and other economic indicators suggest the economic recovery is strengthening.

The next step for the Fed in winding down its unprecedented stimulus policies initiated in the wake of the 2008 financial crisis is raising interest rates from their near-zero range. Bullard said he supports raising rates in early 2015, slightly faster than a majority of his Fed colleagues who are calling for a mid-2015 liftoff.