The US economy may be drifting off course when it comes to inflation after a rate hike implemented in December created an overly-restrictive environment, according to St Louis Federal Reserve Bank President James Bullard who spoke to reporters at St. Cloud State University in Minnesota on Thursday evening.
- Bullard stated that the current federal funds rate is “a little bit restrictive” from an inflation-adjusted standpoint.
- Bullard is the first Fed official to criticize the central bank’s monetary policy following a controversial rate hike in December, though has frequently advised against rate hikes in the past.
- The St Louis Fed President believes that the US is putting downward pressure on inflation and setting the US off target of the 2% inflation goal.
- It is likely that the US will miss the inflation target this year for the 8th year in a row.
Bullard stated that the ongoing issue of the central bank’s inability to meet inflation targets year after year is damaging the bank’s credibility, with 2019 set to be the 8th consecutive year of the bank’s failure to reach its inflation target. The head of the St Louis Fed has been saying for years that interest rates need to be rolled out with great caution, and recent events have lent more credibility to his views.
He was one of the few officials refuting the assertion that a tight labor market would increase inflation, and it now looks as if the Federal Reserve policymakers are finally taking heed and adopting the approach Bullard has been suggesting for some time.
This change has come about since Bullard himself became a policymaker in January, making his voice heard among the majority of officials consisting of hawks as well as dovish policymakers who felt that low interest rates would contribute to the creation of asset bubbles and were to be avoided.
This is not to say that Bullard is personally responsible for the change, but it’s certainly worth noting that an official who has been advocating cautious rate policy and been hailed as an “outlier” by analysts has now gained voting rights.
Fed shifts to Jim Bullard's world after new interest-rate strategy
The world of monetary policy that the Federal Reserve has just entered into is where St. Louis Fed President James Bullard has been for some time. While little is known about the Fed’s internal deliberations. pic.twitter.com/zcPSeay4lu
— Elias Lakkis (@LakkisElias) February 5, 2019
The issue of interest rates and monetary policy in that regard has been a highly-contentious one, with US President Donald Trump repeatedly criticizing the Fed’s rate decisions over the last year, the last rate hike in December being particularly controversial.
Bullard is now the first central bank official to publicly state that the bank may have erred in implementing the December rate hike with overly-restrictive monetary policy which was aimed to raise rates to a neutral level after the US had seen ten years of low rates designed to boost the economy. He has also publicly stated on many occasions earlier in 2018 that the Fed should slow down on rates, stating that the Fed was at “the end of the road” in that regard.
He suggested yesterday evening that the rate hike may be unintentionally resulting in reduced economic growth, adding that the repeated failed attempts to land on target with inflation had “damaged” the bank which now needed to exercise caution moving forward.
Outlook for Coming Years
Fed officials have commented multiple times on the years of accommodative policy, stating that the policy had raised inflation gradually towards the target range.
Bullard is a voter on rate policy this year, and openly advocated careful monetary policy for 2019 after the Fed raised rates a total of four times in 2018 and is now being held at 2.25% and 2.5%.
The Fed has consistently been hitting on the low side of the target inflation range which has averaged at approximately 1.6% since 2012, with some inflation-protected securities estimating that this will remained unchanged for several more years despite the efforts of the Fed to raise inflation.
"We are putting downward pressure rather than upward pressure on inflation,” said Bullard, adding that the pressure may be causing the bank to move further away from the target inflation range required to maintain healthy activity in areas like wages and investing. The Fed will need to “tread carefully” on rate decisions according to the St Louis Fed President.
He stated that Fed officials needed to admit that they simply do not know where “neutral” interest rates actually lie, and that the flattening yield curve that has been emerging even amid tightening monetary policy must not be ignored.
The Treasury yield curve has flattened significantly, and a meaningful and sustained yield curve inversion would send a bearish signal for the U.S. economy, Bullard says https://t.co/piWH3JJeD2 pic.twitter.com/lOc9EHKOku
— St. Louis Fed (@stlouisfed) February 8, 2019
Roberto Perli, a former Fed staffer and current Cornerstone Macro partner, said “Bullard has been an outlier on a lot of issues. This time, he’s right. It looks like the committee has converged to some of his views.”
“What Bullard’s been trying to say is, ‘let’s be really cautious.’ There’s no reason to be charging beyond neutral,” said James Glassman, head economist for commercial banking at JPMorgan Chase.
Robert Brusca, chief economist at FAO Economics, said, “I think Jim Bullard is a genius. He was complaining that the Fed was not looking at the fact that inflation wasn’t rising even though labor markets were tightening.”
Gold is trading up 0.34%, last trading at $1,313.91. Gold technically ticked upward following Bullard’s remarks, although has held firm in the narrow range – it’s unclear if his remarks influenced the short-term price action, but it’s possible that his influence on as a policymaker will be impacting the price of gold and the US economy in general in the near-future.