A September interest rate rise is still “very much in play,” according to Federal Reserve of St. Louis President James Bullard, who said the U.S. will gain from any investor flight to safety from the Greek debt crisis that drives down U.S. bond yields.
“I would say the flight to safety is a bullish factor for the U.S. Increased global uncertainty might be a bearish factor,” Bullard told reporters after delivering a speech in St. Louis on Tuesday. “They roughly offset so it would not change the timing of any rate hike. I would say September is very much still in play.”
Greece on Tuesday became the first advanced economy to miss a payment on IMF debt after bailout talks with creditors collapsed. Some investors are betting that the crisis could delay Fed rate increases if it curbs growth in Europe, which could sap demand for U.S. exports. Bullard said he didn’t think that the crisis would spread.
“The risk of contagion to the rest of Europe from Greece is low because of the ECB’s quantitative easing program, which can be adjusted if necessary to keep volatility low and interest rates low in Europe,” he said. The European Central Bank in March began monthly debt purchases of 60 billion euros under a program also known as quantitative easing.
The policy-setting Federal Open Market Committee left rates near zero at its meeting on June 16-17 and signaled that recovering growth would probably warrant raising rates later this year, though the pace of subsequent increases is likely to be gradual. Officials next meet July 28-29.
“Every meeting is in play depending on the data. Whether we would get enough positive data to push the committee to make a decision in July, I don’t know,” said Bullard, who next votes on the FOMC in 2016. “The tone of the data has been stronger in recent weeks. We are staying data dependent.”
The economy contracted 0.2 percent in the first three months of the year, based on Commerce Department data, and estimates for the second quarter will be released July 30.
’’I would like more evidence that the second quarter is rebounding. I have seen some evidence. I would like to see more,’’ said Bullard, before adding “I have not become a dove.”
In earlier remarks, Bullard said the U.S. central bank may need to raise interest rates higher than otherwise to prevent the emergence of asset-price bubbles.
“The Fed should hedge against the possibility of a third major macroeconomic bubble in the coming years by shading interest rates somewhat higher than otherwise.”