U.S. may only need one rate hike, Fed’s comunication causing confusion: Bullard
The U.S. economy may only need one rate hike for as long as 2-1/2 years and the Federal Reserve is eroding its credibility by indicating otherwise, St. Louis Fed President James Bullard said on Friday in arguing for an overhaul of how the central bank views and discusses policy.
Bullard called for the Fed to discard its practice of projecting long-run values for things like economic growth and the target policy rate, acknowledge it has little certainty about the future, and state that the economy is not likely to get much worse or much better than it is now, absent some outside shock.
Bullard said he felt the appropriate federal funds rate is around 0.63 percent, roughly a quarter point above where it stands, and will likely stay there “for the foreseeable future.” For the Fed to publish projections that it will rise steadily to historic norms of three or four percent has been misleading.
The Fed’s “dot plot” of projected interest rate policy “appears to be too steep. Fed funds futures markets do not seem to believe it. They are priced for a much shallower pace of increases,” Bullard said.
“The Fed’s actual pace of rate increases has been much slower than what was mapped out by the committee in the past. This mismatch between what we are saying and what we are doing is arguably causing distortions in global financial markets, causing unnecessary confusion over future Fed policy, and eroding credibility of the (Federal Open Market Committee),” he said.
The alternative, Bullard said, is to view the United States as in a sort of equilibrium where growth, unemployment and inflation are unlikely to fluctuate, leaving little reason to change the federal funds policy rate, currently in a range of 0.25 percent to 0.50 percent.
Bullard put that theory into practice at the Fed’s meeting this week, leaving his “dot” off the long-range rate projections. In doing so, he signaled he was the lone “dot” that saw only one rate increase between now and the end of 2018.
