Bullard Says Mild Inflation Means Pol­icy’s Too Hawk­ish

The Bond Buyer - - Market News - — Gary E. Siegel

Given that inflation has been be­low the Fed­eral Open Mar­ket’s stated 2% tar­get on an an­nual ba­sis each year since 2012, Fed­eral Reserve Bank of St. Louis Pres­i­dent James Bullard said Thurs­day mone­tary pol­icy might be “too hawk­ish.”

“Mar­ket-based mea­sures of inflation ex­pec­ta­tions sug­gest that fi­nan­cial mar­kets be­lieve the FOMC will again miss its PCE inflation tar­get to the low side in 2019 and, in­deed, for the next five years,” Bullard told the Lit­tle Rock Re­gional Cham­ber, ac­cord­ing to pre­pared text re­leased by the Fed.

“This is a mar­ket sig­nal that the cur­rent stance of mone­tary pol­icy may be too hawk­ish,” he said.

While the econ­omy per­formed bet­ter than ex­pected the past two years, inflation re­mained sub­dued, he noted, which gave pol­i­cy­mak­ers the chance to raise short-term in­ter­est rates. But, with low­ered inflation ex­pec­ta­tions and the pos­si­bil­ity the yield curve will in­vert, Bullard said, that op­por­tu­nity has passed.

The FOMC “should heed these im­por­tant sig­nals in or­der to keep the U.S. ex­pan­sion on track for the next sev­eral years,” he said.

“The FOMC has al­ready been suf­fi­ciently pre-emp­tive over the last two years to con­tain up­side inflation risk,” Bullard added.

The eco­nomic per­for­mance and sub­dues inflation “is fur­ther con­fir­ma­tion that older Phillips curve cor­re­la­tions — link­ing low un­em­ploy­ment to high inflation — have bro­ken down and can­not be re­lied upon to pro­vide a guide­post for to­day’s pol­i­cy­mak­ers,” he said.

The flat­ten­ing yield curve re­mains a threat.

“A sig­nif­i­cant and sus­tained in­ver­sion of the Trea­sury yield curve would be a bear­ish sig­nal for the U.S. econ­omy,” Bullard warned. “In­ver­sions have been as­so­ci­ated with re­ces­sions in the post­war U.S. data,” he said. “The FOMC should mod­er­ate its nor­mal­iza­tion cam­paign given that the yield curve is get­ting close to in­ver­sion.”

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