MNI INTERVIEW: Fed Should Get Going On Rate Cuts -Bullard

The Federal Reserve risks leaving interest rates too high for too long if it delays cuts until the second half of the year, potentially harming the economy or undershooting its 2% inflation target, former St. Louis Fed President James Bullard told MNI.

Policy should be close to the neutral rate by the time inflation is within 50 basis points of 2% to account for the difficulty of measuring inflation accurately, Bullard said. However, the FOMC in December saw rates ending this year at 4.6%, 75 bps lower than today but some 2 percentage points higher than its longer-run estimate, even as core inflation was expected to reach 2.4% by year end. Analysts expect little change to those numbers next week when officials update their projections.

"It would be hard to do anything at this meeting because the most recent inflation data has gone the wrong way. But since last year, there's been a lot of disinflation, and the committee has to take that on board at some point and get going on the rate cuts they have to make," Bullard said in an interview. "Even if they moved a little bit lower from where they are today, they'd still have a restrictive monetary policy and they'd still be pushing inflation toward the target of 2%."

With inflation continuing to trend lower, the policy rate could be too high by the time inflation hits 2%, he said. "I'm not sure what the committee would do in that case. Would they then feel compelled to lower the policy rate very quickly? Would they drag it out into 2025?" he said. "You might harm the economy if you do it that way, or you might end up with inflation below 2%."

SOFT LANDING

Annual CPI unexpectedly rebounded by a tenth last month, after also rising more than anticipated in January, but Bullard maintained disinflation will most likely continue as the economy continues to find its soft landing.

"I've seen many analyses of the January and February data, cutting the data in all these different ways. I'm not that big a fan of that. I think there are known to be seasonal factors in the early part of the year that are hard to handle," Bullard said. "I'm confident that we're still on the disinflationary trend at this point."

GDP growth has been above potential for three straight quarters, so it would be natural to see a slowdown to around 2% in the second half of the year. And even if the unemployment rate, which picked up slightly in February, were to poke above 4% later in the year, "it would be rising to the natural rate of unemployment from below," Bullard said.

"If inflation also comes to 2%, and the policy rate comes to the neutral rate, that's the definition of a soft landing because all the variables are at their long-run values," he said. "You'd like all those things to be true at the same time." (See MNI INTERVIEW; No Fed Cuts Until H2, Ex-KC Fed's Hoenig Says)

STAYING RESTRICTIVE

Some of the FOMC's hesitancy to cut rates appears to stem from a reluctance to signal commitment to a continuous easing sequence, but that needn't be the case, Bullard said.

"I would say I'm making this move because I have the data today. And I may or may not do more of this in the future, depending on how the data come in."

The first rate cut is a "delicate issue" and is being treated as such, Bullard added. Dovish comments from Fed Chair Jerome Powell at his December press conference caused financial conditions to ease quite a bit, but much of that has been reversed, he noted. (See: MNI: Fed Messaging Swings Boost Policy Volatility-Ex-Officials)

Current market expectations for better-than-even odds of the first cut in June with two more to follow later this year seem reasonable, given the behavior of the committee today, Bullard said.

"It would be better if they could say -- and they have said this -- that we'll be cautious as we're lowering the policy rate and we'll be data dependent. Markets do tend to run with it and go too far too fast. But that's why it's important to emphasize that even if they lower the policy rate, they're putting downward pressure on inflation, and that's what's going to push it back to the 2% target."