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REPEAT: MNI: St. Louis Fed Bullard Urges Caution in Rate Hikes

--Inflation Expectations in U.S. Remain Somewhat Low
--Current U.S. Policy Rate Level Appears To Be Neutral
--U.S. Nominal Yield Curve Could Invert This Year Or Next
     TOKYO (MNI) - St. Louis Federal Reserve Bank President James Bullard
Tuesday urged caution in near-term interest rate hikes by the Federal Reserve
Board, noting low inflation expectations and what he sees as a neutral Fed
policy rate, repeating his recent remarks.
     Bullard, who does not vote on rates this year, also said the U.S. nominal
yield curve could invert later this year or next year, which would be a bearish
signal for the U.S. economy.
     He made a presentation on "A Cautionary Note on U.S. Monetary Policy
Normalization" at a seminar in Tokyo hosted by the Japan Center for
International Finance.
     --LOW INFLATION OUTLOOK
     Bullard said market-based measures of inflation expectations remain
centered below the FOMC's 2% target.
     "Market-based inflation expectations can be interpreted as saying that
financial markets do not believe the Fed will quite hit the PCE (personal
consumption expenditure)-based inflation target, even over a period as long as
the next five years," Bullard said.
     He added that a reasonable policy going forward may be to "temper the pace
of normalization" in order to re-center inflation expectations at the 2% target.
     Earlier this month, Bullard said while the labor market has tightened,
there have been no signs of overheating. The market is in "equilibrium," and
could remain there for a long time, he said.
     --NEUTRAL POLICY RATE
     In Tuesday's presentation, Bullard said, "The Fed's policy rate setting is
likely at the longer-run neutral level today, putting neither upward nor
downward pressure on inflation."
     This suggests that it may not be necessary to change the policy rate to
keep inflation at target, he added.
     Bullard 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."
     --CURVE COULD INVERT
     The U.S. nominal yield curve has been flattening since 2014 due to a
combination of rising short-term yields and relatively stable or slowly rising
long-term yields, Bullard said.
     "The U.S. nominal yield curve could invert later this year or in 2019,
which would be a bearish signal for U.S. macroeconomic prospects," he predicted.
     If the yield curve does invert, research by the San Francisco Fed suggests
that the signal of an impending economic downturn would be strong, he said.
     "In my view, it is unnecessary for the FOMC to be so aggressive as to
invert the yield curve," Bullard said.
     --JUNE RATE HIKE
     Bullard didn't say whether the Fed was likely to raise rates at its next
policy meeting on June 12-13.
     The minutes of the May 1-2 Federal Open Market Committee meeting said that
strong labor market conditions and firming price data reassured Federal Reserve
officials that it would be appropriate to take another step in raising interest
rates toward a neutral level, probably as soon as next month.
     "Most participants judged that if incoming information broadly confirmed
their current economic outlook, it would likely soon be appropriate for the
Committee to take another step in removing policy accommodation," the minutes
said.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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