MNI EXCLUSIVE: Bullard Says Fed Could Consider Rate Cut Bias

By Greg Quinn

     CHICAGO(MNI) - The Federal Reserve could consider introducing a bias to cut

interest rates that addresses downside risks, in line with previous practice,

St. Louis President James Bullard told MNI.

     "Based on past behavior, that would be a typical intermediate step that the

committee might take, depending on sentiment around the table. I don't know

where everybody is on this,'' he said in an interview Wednesday in Chicago. "I

think the bond market yields falling as much as they have is a relatively recent

development, so people are kind of digesting that at this point.''

     Bullard said there is a case for a rate cut given the risks of trade wars

and below-target inflation, but he declined to embrace financial markets

signaling that several cuts may be in store.

     "You could make a cut today based both on the idea that you want to

re-center inflation and inflation expectations at target and that you want to

take out some insurance in case the economy slows down more than we think.''

     "We can afford to take it one step at a time at the Fed, and see how the

data come in during the summer here,'' Bullard said, when asked if market

signals about several Fed cuts are reasonable.

     "We have a meeting in June, we can discuss it there and see how we want to

react.''

     The next FOMC meeting is scheduled for June 18-19.

     The PCE inflation rate was 1.5% in April, below the Fed's 2% target, and in

recent weeks bond yields have fallen on concern that trade disputes will hurt

the U.S. and global economies. The Fed is closely monitoring developments in

trade negotiations and is prepared to act "as appropriate" to sustain the

expansion, Chair Jay Powell said Tuesday.

     --YIELD CURVE

     Bullard, who will vote at the next FOMC meeting, said the inverted yield

curve is also "an important signal" for the economy. "To me it's pretty clear

that the bond market is seeing less growth and less inflation in the future than

the Fed is, and that makes me think that the Fed is a little bit out of line

with market expectations, and the yield curve inversion is a symptom of that. So

it's suggesting that we are too hawkish for the current environment."

     Bullard made a case for a rate cut earlier this week in Chicago, where he's

now attending a two-day conference looking at how the Fed could change its

monetary policy tools. Any changes to the toolkit should be cautious ones, he

said.

     "The U.S. should probably not be the big experimenter on the global stage,

because it's such a big economy," Bullard said. "What you would like is for

ideas to be tried out by other countries, smaller central banks they can be the

innovators and then you can copy that into some of the bigger banks later."

     One topic that generated discussion at the conference was whether to expand

or scale back the Fed's 'dot plot,' and Bullard questioned the method now that

interest rates have climbed from around zero.

     "Now that we are off the zero bound it's not so clear what the dot plot is

doing, because it's putting a median rate path out there over the next couple of

years, which is a path that has not really been voted on or vetted by the

committee," he said.

     "The best solution is the Bank of England's solution where they take the

current market expectations of future policy and feed those into the staff

model, and then put out a relatively carefully worded and elaborated forecast of

what they think is going to happen in the U.K. economy."

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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