Fed’s Bullard Says Volatility Won’t Change Economic Outlook

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Bullard: Recent Volatility Won't Alter Fed's Outlook

St. Louis Federal Reserve President James Bullard said that while world financial markets are volatile, U.S. fundamentals are good and the interest rate-setting Federal Open Market Committee shouldn’t alter its forecast for the economy.

“The key question for the committee is -- how much would you want to change the outlook based on the volatility that we’ve seen over the last 10 days, and I think the answer to that is going to be: not very much,” Bullard told Bloomberg Television in an interview Friday at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming.

“You’ve really got the same trajectory that the committee will be looking at that we were looking at before, so why would we change strategy, which was basically to lift off at some point,” said Bullard, who votes on the FOMC next year.

If market turmoil persists, though, that could affect the timing of the first rate increase, Bullard said later in off-camera remarks to reporters.

“The committee does not like to move when there’s volatility,” he said. “If we had the meeting this week, people would probably say let’s wait.”

October Meeting

He added, “but the meeting is not this week, it’s Sept. 16 and 17.” Bullard also said he would support scheduling a press conference following the Oct. 27-28 FOMC meeting if the committee doesn’t raise rates next month. That would make it easier for the Fed to explain a liftoff in October.

Fed officials are weighing when to begin raising interest rates for the first time since 2006. While the U.S. is growing at a solid clip, inflation is below the Fed’s target and the global outlook has been dimmed by a Chinese slowdown that is driving down commodity prices and spurring market turbulence.

Equities around the world have been whipsawed this week, indicating markets remain subject to sudden shifts in investor sentiment. Futures on the Standard & Poor’s 500 Index fell Friday after the U.S. stock benchmark’s biggest two-day gain since the beginning of the bull market in 2009. The yield on 10-year Treasuries was 2.14 percent at 9:01 a.m. in New York compared with 2.18 percent late Thursday.

“I actually think we’re OK on the inflation front,” Bullard said. “I’ve been arguing that we should get going, because interest rates -- it’s not that we’re a little bit below normal, we’re all the way down at zero, so you’ve got to think about: How is this going to play out over the next two to three years.”

Fed’s Mester

Bullard’s comments come after Cleveland Fed President Loretta Mester, who also votes on the FOMC next year, told the Wall Street Journal that market turmoil had not so far altered her view that the U.S. economy “is solid and it could support an increase in interest rates.”

Market volatility and the slowdown in China have prompted many investors and economists who expected a September rate hike to push back their projections.

William C. Dudley, president of the New York Fed, said on Wednesday that “the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago.” He also said that the case for liftoff next month could improve as more information comes in about markets and international developments, and that he continues to hope to lift rates this year.

Delay Liftoff

Minneapolis Fed President Narayana Kocherlakota said Friday that policy makers should hold off tightening for the rest of this year to underscore their determination to bring inflation up to their 2 percent target.

Moving sooner would lead investors to conclude “the Fed doesn’t think it can hit 2 percent,” Kocherlakota said in an interview on CNBC. He is not an FOMC voter in 2015 and has announced his plans to leave the Minneapolis Fed at the end of the year.

Bullard will move into one of the four rotating voting seats next year reserved for regional Fed presidents on the FOMC, along with Mester, Boston’s Eric Rosengren and Kansas City’s Esther George.

Their views during the 2016 policy debate could help to determine how quickly interest rate increases proceed. If the Fed doesn’t raise rates this year, they could also directly influence the timing of liftoff.

George said she’s waiting to see how market volatility shapes up before the September meeting before reassessing her view that an interest rate hike is overdue, speaking on Bloomberg Television in an interview aired Thursday.

Solid Growth

The economy grew more than previously estimated in the second quarter, a report Thursday showed. Gross domestic product rose at a 3.7 percent annualized rate, up from the 2.3 percent the Commerce Department reported last month. Job gains have averaged 211,000 so far this year, and economists expect a 220,000 gain when August data is reported on Sept. 4.

Inflation, meanwhile, continues to run below the committee’s 2 percent objective. The Fed’s preferred indicator climbed just 0.3 percent in June, and hasn’t reached 2 percent in more than 3 years.

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