James Bullard is the former St. Louis Federal Reserve branch president. He spoke on Friday at the National Association for Business Economics (NABE) conference.
The comments were reported by Nick Timiraos of the Wall Street Journal. Timiraos has a reputation for having insider connections at the Fed. Of course, in this case, Bullard is no longer at the Fed and his comments were public, albeit not widely reported.
Bullard thinks the Federal Open Market Committee (FOMC) should cut interest rates at its 19-20 March meeting
- as a preemptive move to prevent the current level of rates from needlessly curtailing economic activity later this year
- danger of waiting is that if inflation moves closer to 2% later in 2024 the Fed Funds would likely remain well above a neutral setting, and this, in the end, require quicker cuts
- “I’m worried that you’re going to get into the third quarter, and the policy rate is going to be too high for that situation, so why not go now”
- “You don’t have to say you’re going to do six [cuts]. You would say, ‘We’re making one move based on the data that we have in hand, and we’re not guaranteeing anything more.”
Bullard acknowledged that the higher than expected CPI data reported last week in the US did make a March cut more difficult for the FOMC
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Fed Funds are currently in a range between 5.25% and 5.5%, which is the highest in 23 years.
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The neutral rate of interest is a theoretical rate at which monetary policy neither stimulates nor restrains economic growth. Its also known as the natural rate of interest, R-star (r*), or the equilibrium interest rate.
- At the neutral rate, the economy operates at its full potential without causing inflation to accelerate.
- The neutral rate is not fixed; it varies over time due to changes in economic factors such as productivity growth, demographics, and the desire for savings and investment.
- The neutral rate cannot be directly observed or measured. Instead, it is estimated through models that consider various macroeconomic indicators. Because of this, estimates of the neutral rate can vary and are subject to revision.
- Policy Benchmark: For central banks like the Federal Reserve estimating the neutral rate is important for setting monetary policy. If the policy rate is below the neutral rate, the policy is considered expansionary, stimulating economic growth. Conversely, if the policy rate is above the neutral rate, the policy is contractionary, slowing down the economy.
This article was written by Eamonn Sheridan at www.forexlive.com. Source