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

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