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Free AccessMNI China Daily Summary: Wednesday, Feb 7
MNI BRIEF: China To Focus On Solar, Wind Power In 2024 - NEA
REPEAT:StL Fed's Bullard: More Hikes Inhibit Return to 2% Infl
Repeats Story Initially Transmitted at 15:15 GMT Aug 2/11:15 EST Aug 2
--Would Not Support Further FFR Increases In Near Term; 'Should Remain on Pause'
--Calls Median Fed Forecast for Rate Hikes 'Unnecessarily Aggressive'
--Support Sept Reinvest Move; Sees Little Upward Pressure on L-Term Yields
By Karen Mracek
ST. LOUIS (MNI) - Not only does St. Louis Federal Reserve Bank President
James Bullard say he won't support more increases in the policy fed funds rate,
in an exclusive interview with MNI Tuesday he warns additional hikes may delay
when the Fed will hit its 2% inflation target.
"Given the inflation outlook, which has deteriorated in 2017, I would not
support further moves in the near term," Bullard told MNI. "It's possible data
will turn around, but we'll have to see. I think for now we should remain on
pause."
Furthermore, if the policy rate is raised according to the median forecast
of the Federal Open Market Committee, which calls for another rate hike this
year and three next year, "I would think of that as unnecessarily aggressive
given the data that we have on the economy," he said. "I think that would
probably inhibit inflation from moving towards 2%."
Bullard last year adopted a regime-based framework for monetary policy. He
sees the U.S. economy currently in a low growth, low inflation, low rate regime,
and he said Tuesday he doesn't "see anything that is indicating a regime shift."
Since debuting his forecast, which does not include a forecast for longer run
rates, he has not advocated for additional rate hikes.
Still he supported the two 25-basis-point increases this year, telling MNI
"I was willing to go along with the Chair's judgement and the committee's
judgement that we could nudge up the policy rate a little bit."
However, now, with weaker than expected inflation this year and no sign of
a regime change, Bullard seems less inclined to agree to another rate hike
anytime soon.
"Expected inflation measures have deteriorated during the first half of
2017 broadly speaking," Bullard said, "and since that's a primary determinant of
actual inflation, it would not bode well for whether we can hit the inflation
target this year or further in the future."
If the committee "pauses or just stays on hold" with the policy rate, he
said, "those inflation expectations might improve and you might be able to hit
your inflation target sooner."
Bullard expects inflation to hit its 2% inflation target in 2018 but that,
he said, is conditional on "not raising the policy rate."
The St. Louis Fed's forecast is for inflation to get back to the 2% target
"faster" than some on the committee expect, he explained, "but that's predicated
on keeping the policy rate more or less where it is, as opposed to the
committee's policy," he said, which is for additional rate hikes this year and
next.
"I don't think we get to 2% this year, but I do think you can get to 2%
next year if you run a reasonable policy," he said.
More than being opposed to near term rate increases though Bullard, who
will vote again in 2019 on the FOMC, said he's against the idea that another 200
to 250 basis points are needed to get back to normal.
"I don't think that's the right context given the regime we're in," he
said. "I think we would do better to admit that we're in a low interest rate,
low growth, low inflation regime. We've got the right policy rate for that
regime."
Of course, it is "possible things will change in the future and we'll
certainly keep our eye out for that," Bullard continued, "but given the data as
we have it today, and given the behavior of the economy as we see it today, we
got the right policy for today."
With a "flat" forecast for the fed funds rate, Bullard said he is "the most
dovish person on the committee right now in terms of the path for the federal
funds rate."
In fact, Bullard said the current rate of 1% to 1.25% "is at, or else close
to, the neutral rate that would keep inflation near target and unemployment low
and stable."
If the FOMC made further moves, "I think what I would be most concerned
about is many consecutive moves of the type the rest of the committee is
contemplating which would move us up to a 3% policy rate," he said.
"I think that is inappropriate given the regime we're in, given the
environment we're in, given the low inflation outcomes that we've observed,"
Bullard said. "I'd rather we didn't go on that kind of a path."
The most recent GDP data validated the persistence of the low growth
regime. GDP growth in the first quarter, recently revised to 1.2% annualized,
"was tepid," Bullard said.
And while there was a rebound as expected in the second quarter, to 2.6%
growth in the first estimate, "if you average out the second quarter with the
first quarter, you get back to 2% on average for the first half of the year," he
said. This is "exactly what we've been saying and is very consistent with what
happened in 2015 and 2016."
While Bullard does not see another rate hike as long as the economy stays
in this low growth, low inflation regime, he does want to move on the balance
sheet reduction plan "sooner rather than later."
"I'd be ready to go at the September meeting," Bullard said. This is
largely when markets expect an announcement to come on the commencement of the
plan to end reinvestments.
The "very workable" plan is "a very, very mild initial approach to balance
sheet reduction," Bullard said, adding "almost nothing happens initially and
then it gradually ramps up over many quarters."
The plan, as outlined at the FOMC's June meeting, would begin with initial
caps on reinvestments of $6 billion per month for Treasuries and $4 billion per
month in mortgage backed securities, climbing over 12 months to $30 billion and
$20 billion, respectively.
"I think it's a good plan and I think it would be prudent for us to allow
this passive run off of the balance sheet," Bullard said. It also would not have
"very much effect on yields," he said, and what effects it does have would be
"very mild and stretched out over a period of time -- two years or more."
Bullard describes it as a normalization of the yield curve. The passive
runoff of the Fed's now $4.5 trillion balance sheet "would put a little bit of
upward pressure on long term yields," he said, "so that you're allowing the
yield curve to not be distorted as much by Fed policy as it otherwise would be.
I think that would be healthy for the U.S. economy."
As a policy matter, the Fed's quantitative easing programs and now large
balance sheet "are distorting the yield curve relative to what it otherwise
might be," he explained. While this was intentional at the zero lower bound,
when the FOMC decided not to take the policy fed funds rate into negative
territory, "it's not clear now" that it is the Fed's intention, Bullard said.
Now that the Fed is normalizing its policy, "you should normalize the
policy rate, but you should also normalize the longer-term rates as well in
tandem so you get a more normal yield curve than you would have under the large
balance sheet policy," he said.
"We are depressing longer term rates with balance sheet," Bullard said, and
moving forward with the plan to gradually end reinvestments "should release some
of the pressure."
--MNI Washington Bureau;tel: +1 202 371-2121; email: karen.mracek@marketnews.com
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.