MNI EXCLUSIVE: Bullard Says Fed Might Forego June Forecasts

--Fed May Not Produce Quarterly Forecasts In June

--Fiscal Response "Right-Sized"

--Optimistic Of H2 Rebound, But Drawn-Out Lockdown Could Have Severe

Consequences

By Pedro Nicolaci da Costa and Jean Yung

     WASHINGTON (MNI) - The Federal Reserve may not have enough clarity on the

pandemic-hit economy by its next meeting in June to offer a new set of quarterly

forecasts, St. Louis Fed President James Bullard told MNI in an interview

Thursday.

     "A lot of times firms stop giving forward guidance on how they think their

business is going to progress. We already did it in our March meeting, we could

continue that," Bullard said. "Generally speaking you'd like to give guidance if

you think you can give something useful."

     The Federal Open Market Committee has not yet made the call on whether to

publish forecasts in June, Bullard indicated. "I'd let Jay Powell make the

decision," he said, referring to the Fed chairman.

     --'TAILORED' REOPENING

     Fiscal support from lawmakers has been "right-sized for the situation"

based on market forecasts that output for all of 2020 is likely to be roughly 6%

lower than 2019, Bullard said. "If you think output will be between 5% and 10%

lower, that's about 1 to 2 trillion dollars" and "on the same order of

magnitude" as bills approved by Congress.

     In contrast, Powell on Wednesday urged Congress to spend more to prevent

prolonged unemployment and bankruptcies as the debate over another large

stimulus bill stalled.

     But Bullard is worried that business shutdowns lasting longer than 90 to

120 days could lead to "worse outcomes" and urged a more "granular approach

tailored to the situation."

     "A financial crisis could develop if the shutdown policy goes on for too

long," he said, or worse, a "depression scenario where you have so many business

failures and you get a lower output for a long time."

     That's not the case at the moment, he noted. Bullard is hanging onto his

optimistic view that the economy could yet stage a rebound in the second half of

the year as parts of the country reopen.

     "Right now I think we're still in good shape, a lot of CEOs say they can

handle this for a quarter," he said. "Banks might even do well through this

crisis" because they are originating government-sponsored loans. "But if a lot

of their credit turns bad, their capital will go down and they'll be in

trouble."

     Bullard said the Fed is paying close attention to the mortgage market,

which some worried could again become a trouble spot -- as during the last

recession -- as consumer finances deteriorate and mortgage servicers run low on

cash.

     "This is something we want to make sure continues to function during this

period," Bullard said referring to the flow of credit to housing.

     Public health experts warn that efforts to reopen the parts of the country

prematurely could lead to a renewed spike in coronavirus cases, and new

shutdowns. But Bullard argues the more we learn about the virus, the more we can

manage the risk.

     "The U.S. economy faces lots of mortality risk, including terrorism risk

and auto accident risk. We don't say everyone has to stay in the house because

there are terrorists out there."

     --PRICE-LEVEL TARGET

     Like Powell, Bullard said the Fed is not considering negative interest

rates despite persistent market speculation to the contrary.

     "The committee has rejected this as a policy outcome for the U.S.," he

said. "If traders want to bet on it, they can bet on whatever they want."

     However, Bullard said he will be pushing for the Fed to consider more

aggressive ways to consistently hit the central bank's official 2% inflation

target. U.S. inflation consistently undershot that goal in the last recovery as

wages remained stagnant for most of the 11-year period.

     In particular, Bullard wants the Fed to consider policies like a

price-level target or a nominal GDP target in order to signal to markets and the

public that the central bank is serious about engendering a robust recovery from

the sudden, coronavirus-led downturn.

     "This might be a logical time to try to go to something more like

price-level targeting or nominal GDP targeting," he said. "That might be helpful

in this situation because it would indicate that rates would stay low until

you're able to get past the shock and get inflation closer to the price level

path."

     "There are things that we can do with forward guidance and we'll probably

look at those in the months and quarters ahead," he said.

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

[TOPICS: MMUFE$,M$U$$$,MT$$$$,MX$$$$]