MNI INTERVIEW: Fed Rates Headed To 4% In Quick Order - Bullard
MNI (WASHINGTON) - Federal Reserve policymakers see interest rates as too high for the current environment and may take rapid steps to bring them closer to 4% before becoming more data-dependent, former St. Louis Fed President James Bullard told MNI.
After kicking off the rate-cut cycle with a 50-basis-point move last week, the FOMC is set to debate whether to keep up the pace in November or slow to a more typical quarter-point cut per meeting speed. The fed funds rate had been set in a 5.25%-5.5% range, a 23-year peak, since July 2023.
"The 5-3/8% rate was put in place when core PCE inflation was running closer to 5%. Now it’s all the way down to the mid-2% range, and the policy rate has to take that on board," Bullard said in an interview.
"So I think it would be reasonable to say people may make the argument to go 50 again in November. The policy rate is just too high for the current situation."
LABOR MARKET JUST FINE
Bullard had been urging the FOMC to get going on rate cuts as early as March of this year to account for the disinflation seen in the second half of last year, but he viewed last week's half-point cut as creating "awkward dynamics" for the committee. (See: MNI INTERVIEW: Fed Can Cut Gradually If Jobs Stay Strong- Kohn)
"You went 50bp and it was somewhat unexpected. Does that mean the committee sees something wrong with the economy? And the answer is no, there’s nothing wrong with the economy. That’s a little bit awkward," he said.
"Second thing, if you’re going to go 50 at this meeting, does it mean 50 at subsequent meetings? The Summary of Economic Projections seemed to say that wasn’t the case, so that’s also awkward." The median projection for the fed funds rate is to cut another 50bp by year-end with two meetings left.
Even the argument that a half-point cut was needed to head off deterioration in the labor market wasn't strong enough as yet, he said. The recent rise in the unemployment rate is best interpreted as part of the long recovery and return to normal from the pandemic rather than any indication of renewed weakness.
"The committee has been predicting that unemployment would go up to the low-to-mid-4% range, and that’s what happened," he said. Meanwhile, GDP growth has stayed strong and jobless insurance claims and layoffs have been low, he noted. "Plenty of things to point to suggest the labor market is just fine."
POLICY IN GOOD SHAPE
Once the policy rate reaches 4%, around the upper end of the range of FOMC estimates of its neutral rate, the committee will have to "feel its way a bit" to neutral, Bullard said.
"Whether you'd want to come down below 4% when inflation is still running above target is a good question," he said. "There's a good debate to be had about how far above neutral, how fast you want inflation to come to 2%, and how much weight you want to put on not going past 2%. All these questions will be relevant."
For now, the economy is in great shape, Bullard said.
"Overall policy has been super successful. You’re within spitting distance of your targets. Most people expect inflation to continue to go down, and there’s not much indication of a recession around the corner," he said.
"The committee may want to say we’re trying to get to 4% and it doesn’t really matter that much what the data would be between now and then," he said. "The good thing about moving 50 is you’d be much closer to 4% now. You could even get there by the end of the year."