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Bullard Warns Delaying Fed Rate Rise Boosts Asset-Bubble Threats

Friday, 29 May 2015 09:49 AM

Federal Reserve Bank of St. Louis President James Bullard warned that keeping interest rates near zero risks inflating asset-price bubbles, saying officials should raise borrowing costs this year as the economy improves.

A prolonged accommodative stance is a “recipe for asset- price bubbles and a lot of mischief to happen,” Bullard said Thursday in a Bloomberg Radio interview from St. Louis. “Asset price bubbles have been a devastating feature for the U.S. economy in the last 15 years.”

The St. Louis Fed leader, whose views have sometimes been a bellwether for the central bank, said his “base case” is for a rate increase this year. Asked if a move in June is possible, he said market expectations for a later increase are justified because economic data have been weak lately.

“We need to get going once we have the opportunity to get going,” Bullard said. “The economy is getting back to normal, but policy is still on an emergency setting.”

“I want to see the data for June and I can make a judgment when I get there,” said Bullard, a non-voting member this year of the Federal Open Market Committee.

Bullard said the weakness in the first quarter probably reflected some seasonal statistical measurement issues, and that incoming data will probably show second-quarter growth is accelerating. Second-half growth will be around 3 percent, he said.

“We need that confirmation” in setting policy, Bullard said. “We have to see that to be sure the first-quarter number is not as weak as it appears.”

Weak 1Q

Gross domestic product in the U.S. shrank at a 0.7 percent annualized rate, revised from a previously reported 0.2 percent gain, as the economy was held back by harsh winter weather, a strong dollar and delays at ports. The median forecast of economists surveyed by Bloomberg called for a 0.9 percent drop.

While consumer spending has been weaker than expected, Americans may be skeptical that lower gas prices will persist and they are likely to be spending more from energy savings in the second half, he said.

The Fed has said it will begin raising rates when it sees further labor-market improvement and is “reasonably confident” inflation will rise back to its 2 percent goal over time. Most economists in a Bloomberg survey late last month predicted the central bank will start tightening in September.

A first-quarter economic chill won’t deter the Fed from its plan to raise rates this year, Chair Janet Yellen said last week, assuring investors that the pace of subsequent tightening will be gradual.

Bubble Risks

Bullard, 54, said waiting too long to tighten risks bubbles more than it does inflation, which has been below the central bank’s 2 percent target. Monetary policy acts with a lag, so the Fed will need to act earlier than the economy returns to normal, he said.

“You can’t be saying that we’re going to get all the way back to perfection before we even start to normalize,” he said. “We’re basically going to be right on our unemployment target and right on our inflation target in the not-too-distant future.”

In the interview, Bullard said he sees the nation’s unemployment rate — which was 5.4 percent in April — falling below 5 percent in the months ahead. As it dips below the “natural” rate, wages should increase, he said.

Bullard co-wrote an academic paper released earlier Thursday that called for the central bank to consider using the nominal level of gross domestic target as a target for policy as a way to stimulate growth when the policy rate is near zero. His 2010 paper entitled “Seven Faces of the Peril” called on the central bank to avert deflation by purchasing Treasury notes. That was followed by a second round of bond buying, or quantitative easing.

Bullard has been president of the St. Louis Fed since 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.

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Federal Reserve Bank of St. Louis President James Bullard warned that keeping interest rates near zero risks inflating asset-price bubbles, saying officials should raise borrowing costs this year as the economy improves.
federal reserve, bullard, rates, economy
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2015-49-29
Friday, 29 May 2015 09:49 AM
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