By Steven K. Beckner
WASHINGTON (MaceNews) – St. Louis Federal Reserve Bank President James Bullard said Tuesday the Fed “took out insurance” against trade-related risks to the economy by cutting interest rates last week and must now determine if more credit easing is needed..
In cutting rates, Bullard told the National Economics Club the central bank “bought some insurance against the deleterious effects this (trade war with China) might have on economic growth.”
Bullard, who dissented when the the Fed’s policymaking Federal Open Market Committee left rates unchanged in June but voted with the majority to cut them last week, suggested he’s now prepared to take a wait-and-see approach: “We’ve already adjusted for the fact that trade uncertainty is going to be high; we have put in a more accommodative policy; now we’ll see if we bought enough insurance.”
Bullard’s comments come less than a week after the FOMC cut the key federal funds rate 25 basis points to a target range of 2% to 2.25%. It was the first rate cut in 11 years following a series of nine rate hikes after a seven-year stay at the zero lower bound.
Since the Fed action, an announcement of impending new tariffs on $300 billion of Chinese exports has provoked a sell-off on Wall Street.
Bullard said “additional policy action may be desirable,” but stopped short of calling for further rate cuts.
The “long and variable lags in the effects of monetary policy suggest that the effects of previous actions are only now beginning to impact macroeconomic outcomes,” he observed.
What’s more, Bullard noted the Fed’s shift from tightening to a neutral stance to a tilt toward easing has had stimulative effects of its own through its effect on market rates even before the actual rate cut. These policy actions “fed through to longer-term yields, which are more important for investment decisions,” he said, noting the 10-year Treasury was trading to yield 3.24% on Nov. 8 and 1.86% on Aug. 2.
“The bottom line is that U.S. monetary policy is considerably more accommodative today than it was as of late last year,” he added.
Bullard repeated previous concerns about low inflation and inflation expectations, and the inverted yield curve, and he expressed heightened worry about risks of an economic slowdown. He warned, “global trade uncertainties may cause this slowing to be sharper than anticipated.”
Bullard endorsed Fed Chairman Jerome Powell’s characterization of last week’s rate cut as a “mid-cycle correction,.”
He said the Fed finished “normalizing” rates with its four hikes last year, and “now what you’d like to do is see if you can find the right level of the policy rate … . That’s how I would think of this as a mid-cycle correction.”
“It’s not clear we want to pile on here,” he continued. Rather the Fed should “see how previous moves affect the economy.” He added he “wouldn’t rule out more changes.”
Bullard said that in the FOMC’s June Summary of Economic Projections, he had projected 50 basis points in cut rates for the year, but declined to commit to that “dot” when the SEP is revised in September.
Continuing his cautious approach, he noted “we now have 125 basis points of accommodation already in train” including long-term rate declines. So he said, “let’s see how the economy responds to that and go forward from that.”
Bullard added, he “would like to do more because I’d like to get inflation and inflation expectations higher while we can.” However, pointing to the two dissents last Wednesday, he noted there is also “a case for doing less.”
Bullard is the third FOMC voter to speak since the rate cut. On Monday two other FOMC voters, Fed Governor Lael Brainard and Kansas City Federal Reserve Bank President Esther George, said they were “monitoring” the market turbulence touched off by President Trump’s threat of additional tariffs on China and the markets’ reaction.
While Brainard, who voted for the 25 basis point rate cut, noted the Fed is “committed to sustaining the expansion” with further interest rate cuts if necessary, George was more noncommital.
“Markets move quickly. It takes some time to see how that evolves,” said George, who voted against last week’s rate cut, told a Kansas City Fed forum “The best you can do right now is just to monitor and see how that unfolds.”