US inflation path since 2012 is worrisome, policymaker says

TOKYO: The current level of US prices is noticeably lower than what it would be if the Federal Reserve had delivered on its two per cent inflation target, St Louis Federal Reserve President James Bullard said, calling the trend “worrisome”.

In slides prepared for delivery in Tokyo yesterday, the US central banker said US prices are now 4.6 per cent below the price level path established from 1995 to 2012, when inflation was growing near the Fed’s target of two per cent each year.

“This is not as severe as the 1990s Japanese experience, but it is worrisome,” said Bullard, who does not vote on US monetary policy this year.

Too-low inflation has kept the Fed from raising rates more than three times since the Great Recession, but since late last year most Fed policymakers have seen faster rate increases ahead, citing improvements in the labour market.

Bullard also said he sees minimal impact on long-term bond yields from reductions in the Fed’s balance sheet, which he hopes will start in the second half of this year.

Bullard, speaking to reporters after the speech, said it was good to cap the amount of mortgagebacked securities and Treasuries that are allowed to run off the Fed’s balance sheet. However, he was indifferent to what the size of the caps should be.

The Fed is monitoring subprime auto and student loans but they are not near danger levels, he added.

US unemployment registered 4.4 per cent in April, below what Fed officials believe is a sustainable level. Most Fed officials expect to raise the target interest rate three times this year, including the increase they made after their March policy meeting

But Bullard said that a surge in inflation is unlikely even if unemployment falls further.

With inflation still below two per cent and inflation expectations and Treasury yields falling since the Fed raised rates in March, the Fed’s plans for rate increases may be “overly aggressive” he said.

The Fed is expected to raise rates at its June policy-setting meeting, and will release fresh economic projections at that time.

Bullard, who regards the economy as mired in a low-inflation, low-growth rut, has said he feels the central bank needs to raise rates only one more time and should then pause until it is clear the economy has shifted to a higher gear. — Reuters