US interest rates ‘in right neighborhood’: Fed

Aug 06, 2019: US interest rates now are “in the right neighborhood,” James Bullard, a key member of the central bank policy board, told AFP on Tuesday, seeming to wave off expectations of another cut soon, despite the relentless pressure President Donald Trump.

After cutting the benchmark interest rate last week, policymakers have “already done quite a bit” to help deal with the uncertainty surrounding trade wars, Bullard said in an interview, and now will watch how the economy reacts before deciding its next move.

Bullard was the first Fed official to call for the central bank to roll back some of the four rate increases adopted last year — something Trump has been demanding almost daily in a constant stream of tweets — did not seem to see an urgent need to move further immediately.

Trump also has demanded the Fed respond to China's moves in the trade war, including allowing its currency to weaken against the dollar.

“China dropped the price of their currency to an almost a historic low. It's called 'currency manipulation.' Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!” Trump said Monday on Twitter.

In the first public comments from a top Fed official since Monday's deterioration in US-China relations, Bullard, president of St Louis Federal Reserve Bank, said the central bankers have “already done quite a bit” to help the economy.

However, he said, “we can't realistically move monetary policy in a tit-for-tat trade war every time there is a threat made by one side or the other side.”

“That would be too volatile,” Bullard said.

“We've already taken into account that there's going to be a lot of uncertainty on the trade policy dimension and that's why we've had this sea change in monetary policy over the previous six months.”

And like Fed Chair Jerome Powell, Bullard brushed off Trump's attacks on the central bank.

“We're making decisions the way we always have,” he said, noting that many Fed leaders have faced political pressure because president's always think lower interest rates are better for them.

The four living former Fed chairs signed an op-ed in The Wall Street Journal published Monday warning of the dangers of political interference in central bank policy and saying they could undermine the credibility of the decisions.

– Waving off rate cut expectations –

Bullard says he has “penciled in” another rate cut for this year but seemed to want to deflate market expectations for the Fed to move at September's policy meeting.

“We're certainly in the right neighborhood. Whether we should do a little more or not will depend on incoming data,” he said.

He suggested he was comfortable with the current stance, saying he wants to see how the economy and inflation perform given the significant moves the Fed has already made, which can take six months before they show up in economic data.

“I do want to take stock about how the accommodation we've put in place has had an impact,” he said.

There was some confusion last week over Fed Chair Jerome Powell's attempts to explain the reasoning behind the rate cut, the first in more than a decade.

Bullard compared the situation to past economic expansions where the Fed has raised rates several times and then taken back a few steps.

“We're trying find the right level,” he said.

Given the Fed's mandate for stable inflation, it has a pretty good record. But, at 1.6 percent, inflation is still in danger of being too far below the Fed's two percent target.

That is “a concern and something we'd like to be able to address,” Bullard said, noting the Fed would like to “see if we can get inflation closer to target or even above target.”

Some central bankers — including two who opposed last week's rate cut — are concerned that cutting rates may cause inflation to spike and prompt risky behavior in financial markets but Bullard downplayed the concerns.

“I don't see anything right now that gives me enough pause to put heavy weight on that argument,” he said, but noted that he is “sensitive to it” since those risks can erupt without warning.

AFP/APP

Posted on: 2019-08-07T01:50:00+05:00

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