St. Louis Fed President James Bullard
The Federal Reserve can afford to stop raising short-term interest rates and wait and see how economic developments and Washington policy debates play out in coming quarters, said St. Louis Fed President James Bullard on Friday.
“Many future developments could impact [the Fed’s] policy path, but the Fed does not need to pre-empt any of them,” Bullard said in a speech to a bankers convention in Nashville.
Optimism about the economy has faded since March with economic data surprising to the downside, he noted.
The St. Louis Fed president has been an outlier among his colleagues, calling for interest rates to remain basically flat through 2019. This is much lower than the median forecast of Fed economists, which calls for one more rate hike this year and three each in 2018 and 2019.
Bullard said he saw no reason to raise interest rates as the economy appears to be firmly stuck in a “low growth, low-inflation and low-interest-rate regime.”
Fed Chairwoman Janet Yellen argued earlier this month that the 4.3% unemployment rate would eventually push inflation higher and the Fed should continue to tighten policy gradually to stay ahead of that process.
But Bullard said the latest economic research suggests that even if the unemployment rate fell to 3.5%, the effects on inflation are likely to be small.
The recent downturn in inflation calls into question the idea that U.S. inflation is reliably returning toward target.
Some analysts have speculated the Fed has been nudging up rates with an eye to cooling off frothy asset markets.
But Bullard pushed back against that idea.
He noted that financial conditions have improved since December on low volatility, higher equity prices and lower credit spreads.
“It is far from clear that a goal of monetary policy is to cause a deterioration in these aspects of financial markets,” he said.
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