MNI INTERVIEW: Fed Set For One Or Two Cuts This Year - Bullard
Former St. Louis Fed chief discusses the U.S. economic outlook ahead of the June FOMC meeting.
The Federal Reserve is likely looking at just one or two rate cuts this year, down from the three it projected in March, after slower-than-expected progress in lowering inflation in the first quarter, former Federal Reserve Bank of St. Louis President James Bullard told MNI.
But, while acknowledging that a hot May jobs report further vindicates arguments for staying higher for longer, especially as growth has also stayed sturdy, Bullard insisted that lowering benchmark interest rates slightly would help set up the economy for rapid growth as inflation returns to target over time.
"The committee is not in any hurry because the economy has been doing really well," Bullard, dean of the Mitchell E. Daniels Jr. School of Business at Purdue University, said in an interview on Friday. "With the jobs market doing well and wealth and disposable income being pretty high, it’s a hard argument to make that consumption will slow down precipitously." (See: MNI FED WATCH: Awaiting Further Evidence, Keeping Easing Bias)
Still, the FOMC can nod to banked progress on inflation by nudging rates down, he said. Headline PCE inflation was 2.7% in April, down from the pandemic high of 7.1%.
"We’ve made a lot of progress on inflation -- enough progress that you can lower the rate somewhat at this point and still get good outcomes," he said. "There should be some technical adjustment -- a little bit lower the policy rate, still restrictive -- and then you can glide into the 2% inflation target slowly over time."
He drew a comparison to Alan Greenspan's endorsement of lower rates in 1995 and 1996 that paved the way for the rapid growth of the late 1990s.
"You’d like to make subtle adjustments to the policy rate so that you set up the economy for rapid growth ahead," he said, adding the term "technical adjustment" would get at the idea that "it’s not a straight line down to the neutral rate."
NEUTRAL NEAR 3.5%
Bullard reckons rates will bottom around 3.5% in this cycle, almost a full percentage point higher than the most recent median FOMC projection, because the real neutral rate has likely risen. Markets anticipate the AI boom to deliver higher productivity growth while global demand for safe assets remains as robust as ever, even if aging demographics is still pushing in the other direction, he said.
"We probably have switched out of the regime in place from 2009 to 2019, that was characterized by extremely low global real interest rates, a lot of debt across the world trading at negative nominal interest rates," he said.
"We're probably into a regime that has higher real interest rates. A number like 1% or 1.5% might be realistic if you think about that's the kind of number we saw in the late '90s and early 2000s -- the last time we had inflation above target persistently and policy was trying to push inflation back down to 2% persistently."
That would translate into a two-year Treasury yield around 3.5%-4% and the 10-year at 4.5%, "normalization of the yield curve that's reasonable for our current situation," he said. (See: MNI INTERVIEW: US Growth Too Firm For Fed To Hit 2%-Blanchard)
NORMALIZING LABOR MARKET
The unemployment rate ticked up to 4.0% last month, which Bullard sees as "a step toward normalization" for the labor market.
The surge in new payrolls in April to 272,000, if driven by an influx of foreign-born workers, may not be as strong a signal for the overall economy as it looks because these workers tend to be on the lower end of the income and consumption distribution, Bullard said.
"Most people think the natural rate of unemployment is in the mid-4s. So to get out of the 3s is more normalization and that makes a lot of sense."