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

--Tightens, Adds Comments From Panel Discussion, Briefing at Bottom
--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 in the face of 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.
     Later he told reporters that the Fed has enough tools to cope with another
recession in the U.S.
     --JUNE RATE HIKE
     In his presentation, Bullard didn't say whether the Fed was likely to raise
rates at its next policy meeting on June 12-13.
     Later, asked about the possibility of a June rate hike at a panel
discussion, he said the current U.S. policy rate is "very reasonable."
     Bullard told reporters that upward pressures on wages are expected to rise
in the U.S. and Japan.
     Asked about the Bank of Japan's yield curve control policy framework, he
said it is "sustainable."
     During the panel discussion, Bullard said the BOJ's 2% inflation target is
good for stable yen exchange rates, given that other major central banks also
target 2%, an argument BOJ Governor Haruhiko Kuroda often makes to justify
aiming at 2% while Japan's inflation has been well below that level.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com
[TOPICS: MMJBJ$,MMUFE$,M$A$$$,M$J$$$,M$U$$$,MT$$$$]

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