Bullard Says He’ll Look Through Oil’s Drop as Labor Market Heals

Federal Reserve Bank of St. Louis President James Bullard said he remains confident in the U.S. and world economic outlook even as oil prices dropped to the lowest level since 2009.

“I know there are a lot of worries about global growth, a lot of it coming from China,” Bullard, who votes on monetary policy next year, said Friday in a SiriusXM Business Radio interview. “I would probably be more sanguine than the market in that dimension.”

He also said the Fed doesn’t react directly to equity markets, as the Standard & Poor’s 500 Index headed toward its worst week in three years.

Fed officials showed concern about stubbornly low inflation even as they indicated that an improving job market is bringing them closer to the first interest-rate increase in almost a decade, according to minutes of the July 28-29 Federal Open Market Committee meeting released this week.

“On the growth side, the outlook is relatively good” and the expansion in second half is likely to be “above trend,” Bullard said. There has been “very good performance of U.S. labor markets over the past two years.”

Unemployment is likely to go below 5 percent, the lower end of the FOMC’s estimate of full employment, he said.

Bullard said the Fed doesn’t react to financial markets directly, though is influenced by the outlook for the economy if that changes. While crude oil prices slumped to the lowest level since 2009, Bullard said the bulk of the decline over the past year has been driven by increased supply rather than lower global demand.

Inflation Goal

“I have talked about the dangers of staying at zero too long,” Bullard said, adding he remains confident inflation will move back to the Fed’s 2 percent target once the transitory influences of falling commodities prices go away.

The committee’s hand-wringing over its inflation goal was interpreted by investors as a lack of conviction they would be ready to raise rates at the Sept. 16-17 FOMC meeting. The probability of a September rate increase fell to 34 percent today, according to prices in the federal funds futures markets, from 50 percent earlier on Wednesday.

“No decision has been made by the FOMC” he said. “There has been a lot of cumulative progress in labor markets and I think you can look through the decline in oil.”

Global commodity prices have slumped, due in part to a Chinese slowdown, and this could maintain downward pressure on inflation, while U.S. wages have been stuck in a narrow range of about 2 percent since the recovery began in June 2009.

A voting member of the FOMC this year appears ready to support removing stimulus. Earlier on Friday, the Richmond Fed said its president, Jeffrey Lacker, will give a speech Sept. 4 titled “The Case Against Further Delay.”