Fed's Bullard: See Infl Expectns Staying Below Fed 2% Target

--Current Policy Rate Appropriate in Near Term

--2017 Data Call Into Question if Inflation Reliably Returning to Target

--Easy Financial Conditions Do Not Contain Important Signal

By Jean Yung

     WASHINGTON (MNI) - Consumers' inflation expectations have slipped over the

past year, contributing to uncertainty over when inflation will again hit the

Federal Reserve's 2% target, St. Louis Fed President James Bullard said Tuesday.

     That, combined with a slowing economy next year suggest the current level

of the Fed's benchmark interest rate "is likely to remain appropriate over the

near term," Bullard said in remarks prepared for an event hosted by the St.

Louis Fed and the Association for Corporate Growth in Louisville, Ky.

     The inflation rate has been below the Federal Open Market Committee's 2%

inflation target since 2012. The FOMC's latest projection for core PCE inflation

is 1.5% by the end of 2017. 

     "Inflation data during 2017 have surprised to the downside and call into

question the idea that U.S. inflation is reliably returning toward target,"

Bullard said. "If the Committee is going to hit the inflation target, it will

likely have to occur in 2018 or 2019." 

     Well anchored inflation expectations and a faster pace of economic

expansion could drive inflation higher. Unfortunately, "inflation expectations

remain below the level that would be historically consistent with the FOMC's

inflation target" and "real GDP growth will likely be slower in 2018 than it has

been in the second half of 2017," Bullard said. 

     Survey-based measures of inflation expectations have "slipped in the last

year" while expected inflation measures based on Treasury Inflation-Protected

Securities, or TIPS, "remain relatively low," he said. 

     At the same time, GDP growth in the second half of the year could surprise

to the upside at around 3% but the pace is not expected to hold up into next

year, Bullard said. 

     He further noted that easy financial conditions likely do not have strong

predictive content for the economy and repeated the Fed bank's long-held view

that low unemployment readings are probably not an indicator of meaningfully

higher inflation over the medium term. 

     Bullard does not have a vote on rates on the FOMC this year or next. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com