MNI POLICY:Bullard Wants Fed to Put More Weight on Yield Curve

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Bank of St. Louis President James

Bullard on Wednesday called for the U.S. central bank to take financial signals

more seriously in determining how fast to lift interest rates, in particular the

shape of the yield curve and market-based measures of inflation expectations. 

     In a talk in New York, he laid out a strategy for extending the U.S.

economic expansion that "relies on placing more weight on market signals than

has been customary in past U.S. monetary policy strategy." 

     Financial markets have priced in a more dovish policy than indicated by the

Fed's forecasts. A relatively flat yield curve suggests that financial markets

"do not see excessive real growth or excessive inflationary pressure over the

forecast horizon," while TIPS-based inflation compensation data suggest markets

do not expect the FOMC to achieve its 2% inflation target over the next decade,

Bullard said. 

     "The empirical evidence on yield curve inversion in the U.S. is relatively

strong, and TIPS-based inflation expectations have generally been correct in

predicting subdued inflationary pressures in recent years," Bullard said.

"Therefore, both policymakers and market professionals need to take these

financial market signals seriously." 

     Bullard has repeatedly warned that the Fed should hold off on any more

increases in interest rates to avoid the risk of the yield curve inverting,

which has in the past signaled a potential recession. He believes maintaining

the current target range for the fed funds rate of 1.75% to 2% is appropriate.

     The St. Louis Fed chief does not vote on interest rates this year. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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