MNI POLICY: Big China FX Policy Changes Unlikely:Fed's Bullard

     HONG KONG(MNI) - China is unlikely to make major changes to its managed

exchange rate policy, James Bullard, president of the St. Louis Federal Reserve

told MNI on the sidelines of an MNI Roundtable dinner in Hong Kong Wednesday.

     "I think they'll be very careful here, they have a lot of reserves and they

don't really have any incentive to deviate from their past policy, I think

anything that they do will be a tweak," Bullard said, noting how international

markets had turned on economies with managed exchange rates in the past.

     Here are key points from Bullard's comments to the Roundtable:

     --Bullard said he would not rule out a rate cut later this year to try to

cement inflation expectations around 2%. "It is a possibility if the inflation

data continue to come in soft," he said.

     --The impact on U.S. inflation of additional tariffs on Chinese goods

should be a "one-time price adjustment," Bullard said. "The committee most

likely will look through that."

     --The U.S. yield curve might steepen a little bit over the next couple of

months if inflation expectation move up a little bit, Bullard said.

     --The normalization of Fed monetary policy has ended, he said. "The end of

normalization, by which I mean a planned schedule of rate increases and balance

sheet reduction, we do not have that any more," he said, "but we still have to

adjust monetary policy in reaction to current events."

     --One tool for China for responding to U.S. tariffs could be depreciating

the yuan against the dollar, but that would hurt the credibility of its managed

currency system, Bullard said. "For a large economy on the global stage, you are

going to have a flexible exchange rate at some point," he noted.

     --China's economy would boom if it agreed a deal with the U.S as it is "an

opportunity for China to prove its willingness and capacity to meet

international standards on trade," Bullard commented. "There would be a blue sky

ahead for China there if they do so."

     China should get serious about providing a trading environment that is

welcoming to the whole world, he said, noting many CEOs have complained to him

that China is a tough place to do business as they are unsure about the rules.

     --Bullard said it was "doubtful" whether there would be much impact on

global markets even if China sells off U.S Treasuries as a weapon in a trade

war. China would have to invest the proceeds in other safe assets, he said,

noting the lack of market impact of the almost $1 trillion fall in China's

international reserves since their 2014 peak.

     --The outlook for the U.S. dollar partly depends on the performance of

other economies, particularly that of Europe, Bullard said, pointing out that a

key issue will be whether the ECB is able to normalise monetary policy after its

new president is appointed to succeed Mario Draghi.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

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