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

Repeats Story Initially Transmitted at 05:34 GMT May 29/01:34 EST May 29

--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