Fed's Bullard Says Weak First Quarter Hasn't Altered Outlook

  • Weak growth at start of year may reflect seasonal factors
  • Inflation is heading up, but expectations remain low, he says

Fed's Bullard on the U.S. Economy, Dollar, Inflation

Federal Reserve Bank of St. Louis President James Bullard said a growth slowdown in the first quarter is probably related to seasonal factors and hasn’t fundamentally changed the U.S. economic outlook, as inflation has picked up.

“Growth has been somewhat tepid,” Bullard said Wednesday in a Bloomberg Radio interview with Kathleen Hays. “Tracking forecasts have been marked down. There hasn’t been all that much data since the March meeting” and the reports that have come in have been “mixed,” he said.

Fed officials are discussing how quickly they should raise rates a second time following the first hike from near zero in December. The Federal Open Market Committee at its meeting last month debated the merits of an April move, with several participants urging “a cautious approach to raising rates” in light of global risks, minutes of the meeting showed on Wednesday.

“You have got this first-quarter puzzle where the first quarter always seems to be weaker,” Bullard said, explaining that probably reflected seasonal adjustments in the data. First-quarter growth was estimated by the Atlanta Fed’s tracking indicator at just 0.4 percent, hurt by weak consumer spending and exports.

While Bullard said he “didn’t want to prejudge” whether the committee could act in April, he said last month’s employment report showed “steady improvement in U.S. labor markets,” which probably outweighs the economic slowdown.

Low Expectations

If sluggish growth were to persist unexpectedly, “I’d be willing to push rate hikes further into the future,” Bullard said.

He added that he wouldn’t be worried if Fed policy resulted in inflation overshooting the central bank’s 2 percent target temporarily.

While “the inflation numbers themselves have been stronger,” Bullard said he continues to be worried about inflation expectations being too low. He said he’ll be “happy to advocate” for a rate hike if he is confident inflation expectations are rising.

Bullard also expressed concern about a “long-term disconnect” between investors’ view of rate hikes and that of the FOMC. “I am worried that gets reconciled in some kind of violent way” if investors change their views suddenly and sharply, he said. 

While the committee has been wary of risks from global markets, “I think there are upside risks as well” to the U.S. outlook, Bullard said.

Odds Down

Investors have lowered the odds of a move in April or June after Chair Janet Yellen said on March 29 that central bankers should “proceed cautiously” amid heightened global risks.

Bullard said he disagreed with Yellen’s concern that a renewed decline in the cost of oil could harm the U.S. economy, adding he still sees consumers mostly helped by low prices. At the same time, a further drop could again lower inflation expectations, which might be worrisome.

Bullard supported the FOMC decision last month to hold off from raising interest rates, while participants scaled back projections for increases this year. The median of policy makers’ updated quarterly projections implied two quarter-point increases this year, down from four forecast in December.

The committee’s statement warned that “global economic and financial developments continue to pose risks” while measures of inflation expectations “remained low.”

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