James Bullard, president of the St Louis Federal Reserve, said on Friday that data since the Fed’s meeting in March has been relatively weak and that the projected path for raising rates may be “overly aggressive”.
Mr Bullard, who is not a voting member of the policy-setting Federal Open Market Committee this year, noted that longer-term yields have declined since March — when the central bank last lifted interest rates — and that both inflation and inflation expectations have weakened.
Indeed, readings on consumer prices disappointed the last two months, with the core consumer price index, which excludes food and energy, rising at a year-over-year pace of 1.9 per cent in April, from 2 per cent the previous month. The Fed has a 2 per cent inflation target.
“This may suggest that the FOMC’s contemplated policy rate path is overly aggressive relative to actual incoming data on U.S. macroeconomic performance,” Mr Bullard said during a presentation at Washington University in St. Louis.
In a Q&A with the audience after his speech, Mr Bullard also addressed questions on another subject that is pre-occupying investors: the Fed’s $4.5tn balance sheet. Mr Bullard said the Fed should “get going” on shrinking its $4.5tn balance sheet but that it should retain the option for more quantitative easing in the future, according to Bloomberg.
Mr Bullard’s remarks come as Fed funds futures market currently implies a 73.8 per cent chance that the Fed lifts interest rates next month, according to the Chicago Mercantile Exchange. Bloomberg calculations put the odds much higher at 97.5 per cent.
But economists at Bank of America echoed some of the St. Louis Fed head’s concerns, arguing that a June move isn’t necessarily a sure bet. They said:
Market participants remain convinced that the Fed will hike in June, despite the recent stress in the markets. We are less sure. We are particularly concerned by the string of weak inflation data which will likely prompt the Fed to revise down their forecasts for core inflation this year. All eyes should be on the Fed’s upcoming communications.