The continued rout on global oil markets has caused a “worrisome” drop in U.S. inflation expectations that may make further rate hikes hard to justify, St. Louis Federal Reserve President James Bullard said on Thursday.
Since the dramatic fall in oil began in 2014 Fed officials have insisted the impact on U.S. price levels would be temporary, bottoming out at some point and allowing inflation to rise to the Fed’s 2 percent target.
Bullard said he has so far been willing to look beyond a slip in expectations as likely passing. But he is now worried the plunge in oil has unmoored inflation expectations as well, a fact that would make it more difficult for the Fed to lift inflation to its 2 percent target and could force officials to rethink the four quarter-point rate hikes expected this year.
“We are 18 months into this and I am starting to wonder if my story is the right one,” Bullard said. “For me inflation expectations are a key factor and if they continue to decline I would put increasing weight on that.”
He said he still thinks that continued strong job creation would “trump” weak inflation and a slowdown in the growth of gross domestic product. The outlook for four rate hikes still seems “about right,” Bullard said.
But, coming from a Fed member who argued for an earlier rate hike and who is considered to be on the hawkish end of the spectrum, Bullard’s comments reflect the depth of concern at the Fed that it may struggle to meet its inflation goal given the state of the global economy.