St. Louis Fed President James Bullard was sounding quite dovish on the rate outlook for the FOMC in an interview on Monday. As one of the five District Bank Presidents with a vote on the rate-setting committee in 2019, it would be a mistake to ignore his sentiments. It raises the possibility that he will dissent in the FOMC vote at the June 18-19 meeting. However, I would expect that at least for the time being, his voice will remain an outlier from the consensus.
Negative impacts from trade and tariff policy are starting to show up in the economic data. Most notably, the ISM Manufacturing Index for May clearly reflected the downside realities of the latest round of punitive tariffs, and a hint that expansion was leveling off to a lackluster pace. But something similar was seen last year around this time when the first wave of tariffs were imposed, and the economy managed to adjust reasonably well. This year won’t have the presence of fiscal stimulus and the global economy isn’t growing as consistently, so the outcome may not be the same. Policymakers will be watching the data carefully to discern how deeply and pervasively the latest tariffs reach into domestic growth.
Bullard and his views on monetary policy do not fit neatly into the dove/hawk paradigm. He is perfectly capable of supporting – or not – adding – or removing – accommodation according to his view of the economy. Ever since the publication of the St. Louis Fed’s “New Characterization of the Outlook for the US Economy” nearly three years ago on June 17, 2016, his views have been consistent with a framework of low growth, low interest rates, and low inflation. Since then, he hasn’t expressed much agreement with the FOMC’s decisions to cautiously raise interest rates, but he also hasn’t offered a lot of outright opposition. This could be changing.
Nonetheless, Bullard’s comments that it “downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown” are probably somewhat at odds with how other policymakers will interpret the current economic data and forecast developments over the medium term.
If inflation and inflation expectations are a concern, the other half of the dual mandate will need attention as well. The US economy has been experiencing an extended undershoot on the Fed’s longer-run unemployment rate. If growth has slowed, at present employment cannot be seen as anything except having very little slack left. If inflation is running below target, most policymakers would agree that the readings seen in the PCE deflator’s year-over-year increase in the first months of 2019 are due to transitory factors. Other inflation measures are running close to target and inflation expectations have taken a turn higher as a consequence of tariffs raising costs for businesses.
I would wait for one of the more centrist of policymakers to add his/her voice to calls for an “insurance” rate cut before getting to exercised about Bullard’s leaning toward one. Many policymakers may feel that the wait-and-see approach is the right stance to preserve growth.
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