MNI 5 THINGS: Fed's Bullard: Favors Leaving Rates Unchanged

--5 Things We Learned From St. Louis Fed Bank President James Bullard's Q&A

By Sara Haire

     WASHINGTON (MNI) - St. Louis Federal Reserve Bank President James Bullard

participated in a moderated Q&A at the Ascension Health Management Annual

Conference in St. Louis on Thursday. Here are 5 things of note from the speech.

     - President Bullard repeated his stance of favoring leaving rates where

they are right now, contrasting with the FOMC's June SEP that indicated one more

rate hike in 2018 than what was reported in March. He noted that market

expectations forecast inflation to be lower than the Fed's estimates, suggesting

that the Fed is in "good shape" to slow down raising rates or even halt rate

increases. He explained that the Fed should watch "how the data evolve" and not

necessarily follow the "prescribed further normalization," he said to reporters.

Bullard is currently a non-voting member of the FOMC, but will be a voting

member in 2019.

     - "There could be an upside to the trade rhetoric," Bullard said, but noted

that the U.S. is likely to be along for a "bumpy ride" as negotiations continue.

He explained to reporters after his discussion that he is "hearing full-throated

angst" from business contacts within his district regarding trade uncertainty,

and some are using the imposition, and even possible imposition, of tariffs "as

a reason to raise prices," he said. While he did acknowledge the risks and the

positive benefits that may come from renegotiated trade policies, he remains

skeptical that trade negotiations will lead to anything meaningful, and that we

could end up with essentially the same regime.

     - The potential for a yield curve inversion is a "key near-term risk" for

the Fed to consider according to Bullard. The St. Louis chief has been very

vocal in warning against the potential for the yield curve to invert. If it does

invert, there could be a recession on the forefront according to studies done on

the correlation, Bullard explained. The Fed needs to "respect the forecasting

power" of this indicator going forward, he said. This risk should cause slower

rate hikes until it is clear that inflation or long-term yields are on the rise,

he explained.

     - The historically low unemployment rate, now at 3.8%, has caused some

economists and policymakers to speculate whether inflation will begin to pick up

in the near-term as the Phillips curve has been an indicator of such a reaction,

but Bullard disagrees. The Phillips curve has been nonlinear lately, which

Bullard explained shows that the correlation between inflation and the

unemployment rate may not be as strong anymore. He said that unemployment could

continue to go lower without inflation having a large reaction.

     - Bullard noted that the "best bet" for the U.S. is that it will remain in

a low inflation, low growth regime at least for a couple years, later explaining

to reporters that despite the high estimates for 2Q GDP, 2019 and 2020 estimates

for GDP show growth returning to more normal levels. The fiscal stimulus is

likely to have a temporary boost for growth in the near-term, but will fizzle

out in the longer-term. Bullard explained that the Fed should not "react with a

permanent rate increase to a temporary growth situation." 

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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