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Free AccessMNI 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
[TOPICS: MMUFE$,M$U$$$,MT$$$$,MX$$$$]
To read the full story
Sign up now for free trial access to this content.
Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.