MNI: Bullard Sees Fed Less Behind The Curve Than Critics Say

The Federal Reserve is less behind the curve than many observers think, St. Louis Fed President James Bullard said Thursday, because the central bank's enhanced credibility since the 1970s Great Inflation means markets adjust faster to forward guidance.

The recent rise in two-year note yields to around 2.5% leaves a narrower gap between market expectations for tightening and traditional Taylor rule models than Fed critics believe, Bullard said in prepared remarks to the University of Missouri.

“Credible forward guidance means market interest rates have increased substantially in advance of tangible Fed action," he said. "This provides another definition of ‘behind the curve,’ and the Fed is not as far behind based on this definition.”

Bullard has been among the more hawkish voices on the FOMC, and was the lone dissenter who favored a more aggressive 50bp hike in rates at the March meeting.

The U.S. economy is still booming and the 3.6% jobless rate can keep finding its way lower, Bullard said, meaning the expansion can persist even as the Fed tightens. “The expansion is not ‘old’ and can continue for a long time,” he added.

Still, he warned against dismissing potential warning signs from an inversion of the yield curve. “This market-based signal has been an accurate predictor of recessions in the postwar data, and so it must be taken seriously,” he said.