Bullard Says Markets Making a Mistake On Fed Tightening

Financial markets are probably mistaken if they’re counting on Federal Reserve interest-rate increases to occur more slowly than policy makers forecast, St. Louis Fed President James Bullard said.

Futures contracts on the federal funds rate show investors expect the benchmark to rise to 0.63 percent at the end of 2015, while the Federal Open Market Committee’s median projection for the end of next year is 1.13 percent.

“The market is trading too dovishly compared to the committee,” Bullard said today in an interview on SiriusXM satellite radio. “I think that’s probably a mistake,” he said, adding that market participants “should come closer to where the median of the committee is.”

Bullard said he projects the FOMC will announce the first rate increase since 2006 at the end of the first quarter of 2015, while noting his forecast is “probably on the early side” of those of his colleagues on the committee.

“The case for the end of the first quarter next year is improving because labor markets have improved a lot,” he said.

The Fed continued to trim its asset-purchase program last month and said disinflation risks had subsided. Fed officials also said that although the unemployment rate had fallen, a range of other indicators show “significant underutilization of labor resources.”

Job Growth

Employers added more than 200,000 jobs for a sixth straight month in July, the longest such period since 1997, a Labor Department report showed earlier this month. The jobless rate climbed to 6.2 percent as more people entered the labor force in search of work.

“We’re way ahead of where we expected to be” in terms of the Fed’s employment mandate, Bullard said. “If that strength continues in the second half of the year here, then the conversation on a little more hawkish direction of monetary policy will heat up.”

Bullard’s views contrast with those of his FOMC colleague Narayana Kocherlakota, president of the Minneapolis Fed.

“The FOMC is still a long way from meeting its targeted goal of price stability” because of excess slack in the job market, Kocherlakota said in a speech today in Brainerd, Minnesota.

The Minneapolis Fed chief predicted the unemployment rate would decline to “around 5.7 percent” by the end of this year. He said “progress in the decline of the unemployment rate masks continued weakness in labor markets,” which would keep the inflation rate below the Fed’s 2 percent target until 2018.

Slack Gauges

Kocherlakota pointed to the share of people between the ages of 25 to 54 who have jobs, a number he described as “disturbingly low,” as a sign of labor-market slack. The measure retreated in July from a post-crisis high of 76.7 percent in June and remains well below the previous cycle high of 80.3 percent reached in January 2007.

Another “especially significant” measure of slack is the “historically high” percentage of workers who would like full-time jobs but can only find part-time work, Kocherlakota said. A broad measure of unemployment that includes people working part time because they can’t find full-time jobs rose to 12.2 percent in July after declining one percentage point over the first six months of the year.

“If demand were sufficiently high to generate 2 percent inflation, the underutilized resources would be put to work,” Kocherlakota said. “The most important of those resources is the American people. There are many people in this country who want to work more hours, and our society is deprived of their production.”

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