By Laurie Laird
LONDON (MaceNews) – Recent U.S. rate cuts have exerted an oversized dose of stimulus, potentially paving the way for moderate monetary tightening as early as next year, according to a noted Federal Reserve dove.
“I am hopeful that the Fed has taken out enough insurance,” St. Louis Federal Reserve President James Bullard said Tuesday. “We can take back that insurance during 2020 or 2021 if it turns out we were overly worried about downside risk.” Bullard dissented from Federal Open Market Committee decision to shave a quarter point from the Federal Funds rate in September, voting for a larger, 50-basis point rate reduction. Despite his somewhat-more hawkish tone, Bullard refused to be drawn on whether FOMC members have begun converging on a consensus outlook. “I don’t want to characterize my colleagues’ views,” he said.
Rate reductions executed in July and September exerted a “much bigger effect than what you would get than just looking at the two rate cuts,” Bullard told journalists after addressing economists in London, noting that the yields on U.S. two-year notes have dropped by 135 basis points during the last 11 months. “The effect was much larger because the expectation as of late last year was that the FOMC would actually raise rates further in 2019.”
Bullard didn’t rule out “additional accommodation” in months to come, given persistent uncertainty over trade policy, adding that he will base his views on a “meeting-by-meeting basis.” He declined to specify indicators that could cause concern, saying only that unemployment and consumption data are “backward looking.”
He did acknowledge that the ongoing trade war between the U.S. and China does raise the potential for a shock to the global economy, noting that such conflicts rarely resolve quickly. “We’ve opened a Pandora’s box … if you study history [trade negotiations are] very long and involved.” Many countries prefer to protect favored industries and “really don’t want to get a solution.”
But were a recession to hit, Bullard would not support following Japan and the European Union in pushing interest rates below zero. “Negative rates have had mixed results where they’ve been tried … and there are issues in the U.S. that call into question whether we’d want to employ that policy,” including the sheer size of the U.S. Treasury market.
Negative rates on government on European and Japanese government debt reflect a paucity of “safe assets,” and raises the question of whether we should raise more sovereign debt in the developed world economy,” he said. But Bullard declined to comment on whether the United States would benefit from issuing further debt.
— Courtesy of MT Newswires