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REPEAT: MNI:Fed's Bullard: 'Crunch Time' on Yield Curve Risk

Repeats Story Initially Transmitted at 16:24 GMT May 11/12:24 EST May 11
--Current Policy Rate Pressing Against 'Upper Bound' of Neutral
--Low Market-Based Measures Of Inflation Reason for Caution on Rate Increases
--Labor Market At 'Equilibrium,' Could Stay For A Long Time
By Sara Haire
     WASHINGTON (MNI) - Further interest rate increases out of the Federal
Reserve could cause the yield curve to invert as soon as September, a reliable
signal of an impending downturn, Federal Reserve Bank of St. Louis President
James Bullard said Friday. 
     He again urged caution in hiking rates, saying the Fed's current target
range of 1.5% to 1.75% "is already pushing against the upper bound of the
neutral level today." 
     Bullard, who does not vote on rates this year, is among those most
concerned over the diminishing spread between short-term and long-term bond
yields, reiterating his warning first issued last month that if the yield curve
inverts, it could be a sign of an impending economic downturn. 
     Other Fed officials including Chair Jay Powell, San Francisco Fed President
John Williams and Cleveland Fed chief Loretta Mester, all Federal Open Market
Committee voters this year, have suggested the recent flattening of the yield
curve does not signal the U.S. economy is hurtling toward recession. 
     --DOWNTURN COULD FOLLOW
     Given low market-based measures of inflation and rising short-term rates,
further rate increases could cause the yield curve to invert, Bullard said.
     "It's getting close to crunch time," he told reporters after giving a
presentation to the Springfield Area Chamber of Commerce in Springfield, Mo. The
yield curve could invert after just two more rate hikes, he cautioned, adding,
"I don't think it's likely to happen that fast, but in the next year it could be
a tangible issue." 
     But research suggests policymakers might still have two to eight quarters
to think about what to do after a yield curve inversion and before an economic
downturn hits, he said. 
     Minneapolis Fed Bank President Neel Kashkari has made similar comments,
saying the flattening of the yield curve indicates nearing neutral policy
territory, implying the Fed should reconsider its gradual tightening policy
path.
     By contrast, Williams of the San Francisco Fed recently said that as
interest rates rise, the flattening of the yield curve "is a normal part of the
process," something Fed Governor Randal Quarles has also maintained.
     --SLIGHT OVERSHOOT OK
     The current policy rate is "likely neutral" already, Bullard said, and the
Fed should not "disturb" the "champagne economy," with an unemployment rate
below 4% and inflation at or below 2%. 
     While the confidence bounds around the real neutral rate of interest is
very wide, empirical evidence suggests it is somewhere below 0, meaning the
nominal rate is below 2%, he said. 
     The "full steam ahead" attitude towards the current normalization path
should be tempered given also the low market-based measures of inflation
expectations, leeway for higher business investment and a labor market at
equilibrium, he said.
     The Fed has "already been preemptive in keeping inflation and expectations
in line," Bullard told reporters. "I have no problem with some overshooting of
the target," he added, joining the slew of policymakers who have reiterated the
"symmetric" nature of the Fed's 2% inflation target.
     There does not appear to be a risk of an inflation breakout, he said, and
markets appear to agree. "Financial markets believe there is currently little
inflationary pressure in the U.S.," he said, another reason to be patient in
tightening, Bullard asserted.
--WATCHING INVESTMENT, TRADE 
     Another reason for the Fed to take a pause, Bullard noted, is to allow
business investment "room to grow." The impact of the recent corporate tax
reform is still being speculated upon, but Bullard asserted that it is possible
the economy could grow more rapidly with stoking inflation. 
     Several Fed officials have warned that the uncertainty of trade policies
poses a large risk to business investment. Bullard, in response to a question
asked by MNI, said that the risks may be more balanced when it comes to the
Trump administration's trade policy, depending on the outcome of the
negotiations.
     Further, Bullard seems confident that the tight labor market is not and
will not exert much pricing pressures. 
     While the labor market has tightened, he said there there have been no
signs of overheating. The market is in "equilibrium," and could remain there for
a long time, he said. 
--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com
MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com
MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com

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