Bullard Says Slowing of Inflation Might Prompt Taper DelaySteve Matthews
Federal Reserve Bank of St. Louis President James Bullard said a further slowing of inflation could prompt policy makers to suspend tapering of bond purchases, though he doesn’t expect that to happen.
“I still think it is important to defend the inflation target from the low side,” Bullard, who doesn’t vote on policy this year, said today in a Bloomberg Radio interview with Kathleen Hays and Vonnie Quinn in St. Louis. “If inflation takes another step down, that will put heavy pressure” on policy makers “to take further action.”
The Fed’s preferred gauge for inflation declined to a 0.9 percent 12-month pace in February from 1.2 percent in January, and it has been below the Fed’s 2 percent target for almost two years.
Inflation “has stabilized at a low level” and is “about to head higher,” Bullard said. A pickup in the U.S. economy, stable inflation expectations in the U.S. and a recovery in Europe that should help global growth all suggest inflation will move back up toward the Fed’s target, he said.
Still, “if inflation fell meaningfully below 1 percent and looked like it would stay there, I think the committee would have to take action,” Bullard said, pointing to a parallel with the European Central Bank. “That is a similar situation to what has happened at the ECB, and what we have seen in Europe is that has put heavy pressure on the committee.”
U.S. policy makers “have a clear card we can play,” Bullard said. “We can delay the tapering program” which would put off an interest-rate increase as well. “That would change the entire timing of the exit program.”
Bullard’s views have swayed investors in their outlook on interest rates. Bullard’s speeches and interviews prompted moves in the 10-year U.S. Treasury yield more than any other Fed official including former Chairman Ben S. Bernanke last year, according to an analysis by Macroeconomic Advisers LLC, a research firm cofounded by former Fed Governor Laurence Meyer.
Fed Chair Janet Yellen said on March 31 the economy will need stimulus for “some time,” easing concern among investors that the central bank would move quickly to raise interest rates after ending bond purchases.
Yields on Treasury securities rose after Fed officials, in forecasts for a March 18-19 meeting of the Federal Open Market Committee, prompted expectations that interest rates over the next two years may rise faster than previously anticipated.
The yield on the benchmark 10-year Treasury note climbed five basis points, or 0.05 percentage point, to 2.8 percent at 4:50 p.m. New York time, according to Bloomberg Bond Trader prices.
Bullard, in the interview, said he was “one of the more optimistic people on the committee” in his assessment of the outlook for growth, unemployment and inflation. The Fed is likely to need to raise rates in the first quarter of 2015, he said.
“I have unemployment coming all the way down to 6 percent or below 6 percent in 2014,” Bullard said. “I have faster growth. We would be in a good position” to increase the main interest rate during the first quarter of next year.
The target interest rate could be raised to 4 percent by the end of 2016, Bullard said, forecasting a higher number than other Fed officials. That would reflect a normalization of monetary policy stemming from a more normal economy, he said.
“I do project it will be a good year for the U.S. economy,” with growth of about 3 percent, he said. “Many of the factors we have worried about that were growth inhibitors” are waning, including less conflict over U.S. fiscal policy. “Political wrangling has dissipated at least for this year.”
Expectations of a lower-than-normal target rate in 2016 reflect in part a global environment in which real -- or inflation-adjusted -- interest rates have been low, Bullard said later to reporters. Various Fed and private economists have come up with differing explanations, with Bernanke pointing to a possible “global savings glut,” though other reasons make some sense too, he said.
“Real interest rates look low and look like they are going to continue to be low but I admit I don’t have a great theory for that,” Bullard said to reporters.
The St. Louis Fed official also said the reduction in bond buying has turned investor attention to the timing of an increase in the main interest rate. “But that date is still some considerable distance away,” he said.
Atlanta Fed President Dennis Lockhart, speaking in Miami, said he sees a “very high bar” to changing the pace of tapering.
Bullard said in the interview he doesn’t see signs the record stimulus has created an asset-price bubble.
“Our main risk going forward is that a bubble will form as we are trying to exit from our extraordinarily easy policy,” he said.
The median of Federal Open Market Committee participants forecast their target interest rate will be 1 percent at the end of 2015 and 2.25 percent a year later as they upgraded projections for gains in the labor market.
The FOMC said in a March 19 statement it will look at a wide range of data in determining when to raise the main interest rate from zero, dropping a pledge to consider raising borrowing costs when the unemployment rate declines to 6.5 percent.