‘Fed should be cautious with further rate hikes’

TOKYO: The US Federal Reserve will have difficulty raising interest rates significantly beyond the settings of its Japanese and European counterparts, which are still pursuing accommodative policy, St Louis Fed President James Bullard said yesterday.

Bullard, who has previously flagged the need for a caution in raising rates, told reporters on the sidelines of a seminar in Tokyo yesterday the Fed had enough tools and policy options to respond if the US economy falls into a recession.

He said in a speech earlier in the day that US interest rates may have already hit the “neutral” level that neither encourages nor discourages economic activity.

“It is hard for US rates to get too far out of line with the global rate situation, and obviously both the (Bank of Japan) and the (European Central Bank) are continuing very accommodative policies,” Bullard told reporters.

“Is it constraining? It is in the sense that there is a global equilibrium of rates and if you get too far out of line things have to happen, exchange rates have to move, and other things have to happen.”

Bullard said he did not want to prejudge the Fed’s next meeting in June, but he reiterated his view that the Fed does not need to raise interest rates further because inflation expectations are low.

The Fed held interest rates steady in a target range of between 1.5% and 1.75% on May 2.

The US central bank is expected to raise rates in June, and continue a gradual series of increases until perhaps the middle of next year.

In prepared remarks, Bullard repeated his views that inflation expectations remain a bit below the Fed’s 2% inflation target, and that interest rates worldwide are being held down by longer term economic and demographic trends. – Reuters