MNI INTERVIEW: Bullard Says March Is Too Early For Fed To Cut

Federal Reserve officials are likely to begin cutting interest rates around the middle of next year to ensure monetary policy does not tighten as inflation falls, though market bets on March cuts are overdone, former St. Louis Fed President James Bullard told MNI.

“On the idea of March as a possible timing for a rate cut, I think that’s probably premature,” Bullard said on MNI’s FedSpeak Podcast.

“I just don’t think there will be enough information at hand to really make that kind of a decision because once you move you’re going to be very reluctant to go back in the other direction. So you probably want inflation to come down precipitously even from where it is today, certainly with a two-handle, maybe even two-and-a-half, is where you’d want to be when you start this process.”

The Fed’s preferred PCE inflation measure rose 3% in the 12 months to October and was up 3.5% excluding food and energy.

A strong economy that appears on track for a soft landing, where employment growth remains fairly robust as inflation eases, gives the Fed a cushion before it needs to reduce borrowing costs, Bullard said.

“You might as well just wait for good news to continue to come in on inflation and make sure you have a bird in hand before you start to cut the policy rate. That would argue for something later in the year,” he said. (See MNI INTERVIEW: Fed Could Cut When Core PCE Reaches Around 2.8%)

THREE RATE CUTS

Some rate cuts will be necessary over the coming year to prevent monetary conditions from becoming tighter as inflation declines. “You wouldn’t need the policy rate to be nearly as high with inflation coming down closer to 2%,” Bullard said.

He thinks an ebullient market reaction to the Fed’s dovish message last week is understandable, but also believes market pricing of as many as six rate cuts in 2024 is excessive.

“The three projected by the committee is about right for a soft landing,” he said. “Sometimes markets get carried away in various dimensions but the general story is a very positive one.” (See: MNI FED WATCH: Interest Rate Cuts Begin To Come Into View)

Speculation that an election year will force the Fed to move sooner rather than later is also misguided, he said.

“I don’t think that the politics really affects any decision making. I really never noticed it around the table,” said Bullard, now Dean of Purdue University’s Daniels Business School.

LINGERING INFLATION RISK

Investors could be underestimating the possibility that disinflation stalls or reverses, Bullard said, adding he sees about a 30% risk of such an outcome.

“That leaves a 70% chance that it will continue to decline, which is great, but that 30% is not being priced into markets and I don’t think markets are being careful enough,” he said. “There should be some measure of caution about policy not turning the corner too fast.”

The biggest challenge for the FOMC would be a resurgence of inflation that brings up the “specter of the 1970s” and forces a fresh reassessment of the policy stance.

Back then, the committee pulled back too quickly and inflation resurfaced and took a long time to extinguish.

“It took another eight years to get inflation back to normal. You don’t want to get into that scenario.”

Still, Bullard said getting inflation all the way back to 2% from current levels should not be especially difficult: “I don’t think there’s any evidence that the last part is harder.”