Bullard Says Markets Wrong Not to Expect Mid-Year Rate Rise

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Bullard Says Rates at Zero Not Right for U.S. Economy

Federal Reserve Bank of St. Louis President James Bullard said investors are wrong to expect the Fed to postpone an interest-rate increase beyond midyear, with the U.S. economy leading global growth and unemployment dropping.

“The market has a more dovish view of what the Fed is going to do than the Fed itself,” Bullard said in an interview Friday in New York. “Markets should take it at face value” from the Fed’s rate projections, and it’s “reasonable” to expect an increase in June or July.

Unemployment could fall below 5 percent by the third quarter, he said, adding that both policy makers and private economists have been overly pessimistic in their forecasts for joblessness. The jobless rate was last below 5 percent in February 2008, when it fell to 4.9%.

The Federal Open Market Committee said two days ago it would be “patient” in its plans to raise rates, which Chair Janet Yellen said in December meant no tightening “for at least the next couple of meetings.” The central bank described the expansion as “solid,” while cautioning that inflation could decline further “in the near term.”

The “patient” language could be removed at one of the next two meetings, setting up a discussion on rate increases by midyear, said Bullard, who isn't a voting member of the FOMC this year.

Economic Momentum

“Zero is not the right number for this economy,” Bullard said in a reference to the benchmark federal funds rate, which has been kept near that level since December 2008. “It is hard to rationalize a zero policy rate” because the economy has “a lot of momentum.”

Investors see only a 15 percent chance that the Fed will raise its benchmark federal funds rate in June, down from 30 percent a month ago, according to fed funds futures. The odds that the Fed will have raised rates by December are 55 percent, down from 58 percent a month ago.

Fed officials expect the benchmark funds rate rise to 1.125 percent by the end of 2015, according to the median estimate of their quarterly forecasts in December. These will be updated at the FOMC meeting on March 17-18.

Bullard said low oil prices and low interest rates are “two important tailwinds” for the U.S. economy. He said the European Central Bank’s decision on Jan. 22 to embark on a 1.1 trillion euro ($1.2 trillion) bond purchase program is also a plus, because it helps to keep borrowing costs low in the U.S.

“It’s lower rates that are just coming over to us for free,” he said of the impact of ECB policies on the U.S.

U.S. 10-year yields fell to a 20-month low as a report showed the U.S. economy expanded less than forecast in the fourth quarter. The 10-year yield declined eight basis points, or 0.08 percentage point, to 1.68 percent as of 10:06 a.m. New York time, according to Bloomberg Bond Trader data.

Gross domestic product expanded at a 2.6 percent annual pace, less than the 3 percent median forecast in a Bloomberg survey of economists. Bullard said the pace of growth was in line with the St. Louis Fed bank’s expectations.

The 2.6 percent GDP reading “is fine,” he said. “We will see revisions move it higher or not in the coming month. I think there is a lot of underlying momentum in the U.S. economy and that shows up in the jobs numbers, which have been strong.’’

Bullard also spelled out why he’s optimistic about the U.S. economy’s long-term prospects.

‘‘There are a lot of good things going on,” he said. “You look at the leadership in tech, leadership in energy technology. I still think, you know, despite everything that’s happened in the U.S. economy, that it’s more adaptable, more market-oriented, more innovative, than most economies around the world. And I think that puts us in a leadership position.”

Bullard, 53, has been seen as a bellwether because his views have sometimes foreshadowed policy changes. He published a paper in 2010 entitled “Seven Faces of the Peril,” which called on the central bank to avert deflation by purchasing Treasury notes. That was followed by a second round of bond buying.

Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.

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