THE FEDERAL RESERVE should slow its pace of policy normalization to help re-align price expectations around 2% and maintain the credibility of its inflation target, Fed Bank of St. Louis President James Bullard said Tuesday in Tokyo.
“Inflation expectations in the US remain somewhat low, suggesting that further normalization may not be necessary to keep inflation near target,” Bullard said in prepared remarks for a seminar. “A reasonable policy going forward may be to temper the pace of normalization.”
He also said raising rates aggressively risked inverting the yield curve, an outcome that markets could interpret as signaling an impending economic downturn.
His comments come ahead of a likely rate increase at the Federal Open Market Committee’s (FOMC) meeting in June.
Bullard, who isn’t currently a voting member of the policy-setting committee, said continued low inflation expectations could inhibit the Fed’s ability to maintain the credibility of its 2% target.
He repeated his stance that the central bank should avoid raising interest rates at a pace that pushes up short-term rates above longer-term rates. Historically such a development has often preceded an economic downturn, especially in the US, he said.
Dallas Fed President Robert Kaplan and Atlanta Fed President Raphael Bostic have also expressed concern over a possible flipping of the yield curve.
“It is unnecessary for the FOMC to be so aggressive as to invert the yield curve,” Bullard said. “The US nominal yield curve could invert later this year or in 2019, which would be a bearish signal for US macroeconomic prospects.”
The Fed policy rate is already near neutral, putting neither upward or downward pressure on inflation, added Bullard, who has been the most dovish Fed official over the past two years. He has argued that the US economy has been saddled with persistently low growth, so there is little need to raise interest rates much.
The FOMC is likely to raise rates “soon” if the economy performs as expected, according to the minutes of the panel’s May 1-2 meeting released last week. Investors expect a hike in June, though the outlook for increases in the second half of the year is less certain.
The FOMC has raised interest rates six times since it began the current hiking cycle in December 2015. In March forecasts, the committee was split on whether to lift rates two or three additional times this year amid an improving economic outlook and rising inflation. — Bloomberg