Bullard Calls Raising Rates Unwise as Inflation Falls Short

  • St. Louis Fed leader cites declining inflation expectations
  • Asset-price bubbles aren't a worry amid turmoil, he adds

FOMC Minutes Show Fed Fears

Federal Reserve Bank of St. Louis President James Bullard said recent financial-market turmoil and a further decline in investors’ expectations for inflation have given the central bank scope to delay interest-rate increases.

“I regard it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations,” Bullard, who votes on the policy-setting Federal Open Market Committee this year, said in a speech Wednesday in St. Louis.

Bullard supported the FOMC’s decision to keep interest rates unchanged last month after raising them six week earlier for the first time in nearly a decade. Many Fed officials saw the risks to the outlook increasing amid slowing economies globally and market turmoil, according to minutes released earlier on Wednesday.

The St. Louis Fed chief said normalization of interest rates was designed in part to address the concern over asset-price bubbles, which have become less of an issue with a recent tightening of financial conditions.

“The recent sell-off in global equity markets, along with increases in risk spreads in corporate bond markets, may have made this risk less of a concern over the medium term,” he said.

“These data-dependent changes likely give the FOMC more leeway in its normalization program,” Bullard said.

Responding to audience questions after his speech, Bullard said the U.S. economy isn’t “remotely close” to needing a policy of negative interest rates like the Bank of Japan and European Central Bank. “The outlook for the U.S. is reasonably good. We are more or less on track with the normalization program” even though “it may take longer.”

The median projection of FOMC members submitted at the December meeting called for four additional quarter-point increases in 2016. In his remarks, Bullard said communicating the policy path this way "could be viewed as an inadvertent calendar-based commitment to increase rates."

“Maybe we should get away from how many hikes we should do in a year,” he told reporters after his presentation. “You would like to move on good news about the U.S. economy, reasonably good economic growth, further improvement in labor market, confidence that inflation is coming back to path.”

Growth Outlook

Bullard defended the central bank’s December rate rise, telling reporters that officials had “good reason” to begin the process of putting policy on a more normal course. He said the chances of a U.S. recession aren’t high.

Bullard said he continues to be confident in the U.S. economic outlook and he expects global growth to pick up this year. “I expect 2016 U.S. economic growth to be stronger than last year and I expect U.S. labor markets to continue to improve,” he said.

His pragmatism and reaction to changes in data have made Bullard unusual among Fed officials: Sometimes he has been perceived to be among the more hawkish officials, wanting higher rates as he did last year, and other times he’s sounded more dovish, as he does now.

The Fed’s preferred gauge of inflation has remained under its 2 percent goal since April 2012 and rose 0.6 percent in the year through December. A further decline in crude oil prices to about $30 a barrel has further reduced the outlook for a pickup in prices this year.

Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.

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