Tags: james bullard | federal reserve | patient | rates

Bullard Urges Fed to Drop 'Patient' to Provide Flexibility

Wednesday, 04 February 2015 08:25 AM


Federal Reserve Bank of St. Louis President James Bullard said that when central bankers meet next month, they should drop their declaration to remain “patient” on raising interest rates, giving them more flexibility to tighten in June.

“I would take it out to provide optionality for the following meeting after that,” Bullard said, responding to questions after a speech in Newark, Delaware. “It doesn’t mean we’re going to do anything. To have this kind of patient language is probably a little too strong given the way I see the data.”

Bullard said he expects unemployment, already the lowest since June 2008 at 5.6 percent, to be “below 5 percent by the third quarter” as the economy continues to gain momentum.

The Federal Open Market Committee on Jan. 28 repeated that it can be “patient” as it considers when to raise rates for the first time since 2006. Fed Chair Janet Yellen has said the term means an increase is unlikely in the subsequent two meetings. The FOMC’s next meetings are scheduled for March, April and June.

The committee, meeting last week in Washington, described the U.S. economic expansion as “solid,” while cautioning that inflation could decline further “in the near term.”

Bullard, who doesn’t vote this year on the panel, said the U.S. economy will be aided in 2015 by the plunge in oil prices and the European Central Bank’s plans to purchase 1.1 trillion euros ($1.26 trillion) in bonds, an approach known as quantitative easing, to ward off the threat of deflation.

ECB’s Beneficiaries

“The specter of QE has put downward pressure on global rates, and we are the beneficiaries,” Bullard said in his talk at the University of Delaware. The planned purchases have helped make U.S. Treasury yields “astonishingly low,” he said.

Bullard said that while falling inflation expectations are “disconcerting,” he believes policy makers should ignore some of those signals for now.

The Fed’s preferred measure of inflation rose 0.7 percent in December from a year earlier, and the pace of price increases has lingered below the central bank’s 2 percent target since April 2012.

On top of that, market-based expectations for inflation in the five years starting five years from now — based in part on the yield on Treasury inflation-protected securities — tumbled last month to 1.76 percent, the lowest since 1999.

“For now I think we should set the TIPS inflation data aside until after oil prices stabilize,” he said.

Strong Dollar

Bullard said he’s not worried the U.S. economy will suffer from the strengthening of the dollar.

“That’s a natural factor of an economy that’s improving and what rival central banks are doing,” he said.

Bullard repeated his belief that breaking up the largest U.S. banks would help prevent financial crises.

“We need smaller institutions,” he said. “I would split them up.”

Bullard also said regulation designed to limit risk taking at banks could not, by itself, prevent crises.

“It’s naive to think that macro-prudential tools are sufficient to prevent the next crisis,” he said. “It has to be done in tandem with monetary policy.”

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Federal Reserve Bank of St. Louis President James Bullard said that when central bankers meet next month, they should drop their declaration to remain "patient" on raising interest rates, giving them more flexibility to tighten in June.
james bullard, federal reserve, patient, rates
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2015-25-04
Wednesday, 04 February 2015 08:25 AM
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