“Growth ‘Cracks’ Will Shape Fed Funds Rate Debate”
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For the past 2 years we have seen the Fed move ahead with steady rate increases in an economy that has done better than many had expected, boosted by government spending, tax cuts, and global growth.
The easy part may be over, St. Louis Federal Reserve President James Bullard said in an interview Tuesday, as possible “cracks” in the US recovery begin to show up the Fed’s debate over where the it stands in a rate-rise cycle that began in December 2015, and how much further it should go.
As prior Fed rate increases start to curb the home mortgage market, and the stimulus of tax cuts and government spending begins to slow, the Fed may face a year of difficult decisions, with growth ebbing.
“Whether there are cracks in the US economy’s performance is one of the main challenges for the Fed going forward,” said Mr. Bullard. “I do not have any reason to doubt the economy will slow in 2019 and 2020. It would be much tougher for the Fed to continue to raise at this pace in a slowing economy relative to where we have been.”
The Fed has raised rates 6X in the past 2 years, with an increases expected later this year too.
The last 2 years have been “roses” for the US and world economies, Mr. Bullard said, with US growth expected to exceed 3% for Y 2018, he feels the economy and job market both remain strong.
But, he said it is likely that the country’s longer-term trend growth of 2% or slightly less may resume.
That has become a theme with the FMOC policy makers.
In September, Fed Chairman Jerome Powell spoke about an economy where low unemployment, low inflation, and steady growth would persist.
Then about 8 weeks later a correction wiped out YTD stock market gains, as concerns about global growth came forward, and US data showed weakness in the housing market and business investment.
Mr. Bullard posed the Big Question: If growth slows, inflation remains around the Fed’s 2% target, and the labor market is strong, what is the need for higher interest rates?
“The good news will not last forever, and if potential growth really is at 1.8% the economy is going to return to some level more like that,” said Mr. Bullard.
“The question in my mind is what are we trying to control? We have already been preemptive…We took all this action and it has put us in good shape,” with inflation near target and market expectations about inflation perhaps even a bit weak.
The Fed’s 8 increases since late Y 2015 have set the fed funds rate at a range of between 2 and 2.25%, which Mr. Bullard regards as already near a Neutral mark that is no longer encouraging spending and investment.
Move rates higher, absent an unexpected acceleration in growth, and policy would start to become restrictive.
The Fed’s view is that the Neutral rate is somewhat higher, and that rate increases are likely to be warranted into Y 2020, to as high as 3.4%, and that has been the traditional mark.
Mr. Bullard will be a voter on Fed policy beginning in January, and in a position to formally vote against further rate increases.
“As a baseline most forecasts have the economy slowing down…That is the basic structure we are working with going into 2019,” so again why do rates have to increase?
Tuesday, the US major stock market indexes finished at: DJIA+108.49 at 24747.63, NAS Comp +0.85 at 7082.91, S&P 500 +8.75 at 2682.34
Volume: Trade on the NYSE came in at 800-M/shares exchanged
- NAS Comp +2.6% YTD
- S&P 500 +0.3% YTD
- DJIA +0.1% YTD
- Russell 2000 -2.8% YTD
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