Fed’s Bullard Sees Medium-Term Boost From Trump Spending

  • Policy maker says his near-term policy outlook hasn’t changed
  • Rate increase in December still Bullard’s favored option

James Bullard, president of the Federal Reserve Bank of St. Louis.

Photographer: Sam Hodgson/Bloomberg

Federal Reserve Bank of St. Louis President James Bullard said there’s a chance the U.S. economy could get a medium-term boost if President-elect Donald Trump boosts infrastructure spending and reforms taxes.

While Bullard offered that possibility, he said it’s still too soon to say how the economy may be affected by the election and he hasn’t changed his near-term outlook for growth or monetary policy. A “single policy-rate increase, possibly in December, may be sufficient to move monetary policy to a neutral setting,” he said, according to slides released by his office for a speech in London Wednesday.

James Bullard

Photographer: Scott Eells/Bloomberg

The Federal Open Market Committee said Nov. 2 that the case had strengthened further to raise rates. Prices of federal funds futures contracts indicate investors see a more-than 90 percent probability the U.S. central bank will hike when officials meet Dec. 13-14.

“You’d have to have to have a surprise I think at this point” to stop a December rate increase, Bullard told reporters after his speech.

Fed officials project one rate increase this year and two in 2017, according to the quarterly median estimate submitted by policy makers for their meeting in September. Bullard has argued that the U.S. economy has been saddled with persistently low growth, so there is little need to raise interest rates much. He’s also previously called for one increase this year and to then keep them on hold for an extended period of time.

Election Surprise

Bullard said markets had coped well with Donald Trump’s surprise victory in the U.S. election. The last big dollar move happened in late 2014 and early 2015 and was due to unconventional policy by the European Central Bank, he said.

“Big picture, the FX market does a great job of internalizing future monetary policy,” Bullard told reporters. “At any point in time they’ve already got a baseline case as part of the current price ,and then what happens to change that has to be some surprise in monetary policy.”

Bullard highlighted two particular policies that could support U.S. growth: a “targeted fiscal infrastructure package aimed at increasing U.S. productivity growth” and tax reform to allow repatriation of corporate profits to lift investment. That impact on the economy would probably come in 2018, 2019 and 2020, he said. Over the longer term, he said new trade arrangements and immigration reform could have an important effect.

Proposals for increased U.S. infrastructure spending and lower taxes discussed by Trump during the election campaign could allow the central bank to raise rates faster. Fed officials, including Boston Fed President Eric Rosengren, have said more fiscal stimulus would bolster the case for tighter monetary policy.

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