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Fed’s Bullard Says Low Inflation Warrants Keeping Rates on Hold

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Federal Reserve Bank of St. Louis President James Bullard said interest-rate policy should be left on hold after “unexpectedly low” price data suggested that inflation may not be on track to rise to the U.S. central bank’s 2% target.

(Related: 44% of Americans Don’t Know When the Fed Last Raised Rates: WalletHub)

“Recent inflation data have surprised to the downside and call into question the idea that U.S. inflation is reliably returning toward target,” Bullard said Monday in Nashville, Tennessee, according to the text of his prepared remarks. “The current level of the policy rate is likely to remain appropriate over the near term.’’

(Related: Fed Raises Rates, Lays Out Plan to Cut Balance Sheet)

Policy makers left rates unchanged last month while saying they would begin running off their $4.5 trillion balance sheet “relatively soon,” in a signal that the central bank could announce the timing of the reduction program in September. The Fed bought trillions of dollars of securities to lower long-term borrowing costs after its policy rate was cut to zero in December 2008.

(Related: Gary Shilling: Deflation Likely; Fed ‘Completely Clueless’)

The Fed’s preferred gauge of price pressures rose 1.4% in the 12 months through June and has been under its 2% target for most of the last five years.

Weak global commodity prices have probably contributed to unexpectedly low inflation, Bullard said at the America’s Cotton Marketing Cooperatives conference. At the same time, Bullard said he disagreed with the orthodox policy view that low unemployment contributes to higher inflation, saying there was little relationship. 

“Even if the U.S. unemployment rate declines substantially further, the effects on U.S. inflation are likely to be small,’’ he said. The economy added 209,000 jobs in July and the unemployment rate fell to 4.3%, a Labor Department report showed.

Bullard said the U.S. seems to be on a 2% growth track that started at the end of the 2007-2009 recession, while global growth has been picking up. The combination has led to a weakening U.S. dollar this year, he said.

“The value of the U.S. dollar has declined in 2017, a consequence of the brighter growth outlook for Europe and expectations for a somewhat more hawkish European Central Bank,” he said.

In June, Bullard projected no additional Fed hikes through the end of 2019. Bullard, who doesn’t vote on monetary policy in 2017, has argued that the U.S. economy has been saddled with persistently low growth, so there is little need to raise interest rates much.