MNI POLICY: Fed's Bullard: See 1 More Rate Cut By December

By Jean Yung

     WASHINGTON (MNI) - St. Louis Fed President Jim Bullard on Tuesday said he

supports one more quarter-point rate cut by December as insurance against the

risk that trade policy uncertainty further drags down growth and to bolster

inflation. 

     Speaking to reporters after giving a speech to the National Economists

Club, Bullard said he anticipates trade policy uncertainty to stay high but

cautioned that monetary policy should not respond to every threat and

counter-threat. 

     "I had already penciled in 50 basis points (in cuts) as of June. We made

one of those moves at the July meeting and could make another one of those by

the end of the year. I'll reassess that once we get to the September meeting." 

     He said in public remarks earlier in the day that the current situation did

not appear to warrant a more aggressive 50 bps move. With little imminent threat

of a recession on the horizon, the Fed is instead trying to "find the right

level of interest rates for this environment." 

     --ELEVATED TRADE UNCERTAINTY

     Trade policy uncertainty is "high and will be high into the future,"

Bullard said, adding the tit-for-tat actions from Washington and Beijing that

roiled markets over the past few days have not significantly changed his

outlook. The Trump administration labeled China a currency manipulator Monday

after Beijing allowed its exchange rate to weaken above the psychologically

important level of 7 yuan to the dollar.

     Bullard said he was eager to see how the economy responds to the Fed's more

accommodative policy this year, starting with its switch to a "patient" stance

in January, which was eventually followed by last week's rate cut, the first in

a decade. 

     His expectation is for inflation to accelerate, possibly reaching the Fed's

2% target. Headline PCE inflation is currently 1.4% and core PCE inflation is

1.6%. 

     "We have 25 bps of accommodation coming on board in the second half of 2019

and into 2020. Let's wait and see how the economy responds to that." 

     --DIVIDED FED 

     Addressing the two dissenting votes on the rate cut decision last week,

Bullard acknowledged that "There's a case to be made for doing less." GDP growth

and labor markets are relatively strong, and some have pointed out that the

Dallas Fed's Trimmed Mean Inflation measure, an alternative gauge of trend

inflation, has turned in 2.0% for months. 

     But "I'd like to do more because I'd like to get inflation and inflation

expectations somewhere higher if we can," Bullard said. 

     While he's "sympathetic" to Boston Fed chief Eric Rosengren's concerns that

looser Fed policy could harm financial stability, Bullard said, "I don't see

anything right now that's so persuasive as to make me change monetary policy in

reaction to financial stability issues."

     --REPO FACILITY 

     Bullard endorsed the creation of a standing repo facility and said the idea

seems to be gaining traction among officials. A number of other central banks

have a similar facility and it would complement the Fed's existing reverse repo

operations.

     But there is a "long way to go" before the Fed will be ready to provide

standing repos, he said. Most analysts anticipate the Fed will roll out such a

system some time next year.

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

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