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Fed’s Bullard says interest-rate policy stance is now ‘a little bit restrictive’

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St. Louis Fed President James Bullard has been dovish since 2016 and his colleagues on the central bank last month shifted sharply in his direction.

St. Louis Fed President James Bullard on Thursday said he thinks the central bank’s current interest-rate policy stance is slightly restrictive at the time when the central bank should be more concerned about the slower growth and weaker inflation expected this year.

Gross domestic product was forecast to be “considerably slower” than the expected 3% annual rate this year and the risks are tilted to the downside, he said. At the same time, markets expect the Fed to miss its 2% inflation target in 2019, for the eighth year in a row, he added.

In this environment, the Fed should be more worried about missing on its inflation target to the low side rather than any spike in inflation, he said.

“We have to, even today, be more worried about missing to the low side than the high side,” he said.

Bullard said interest-rate policy at the moment will push inflation down. “We’re a little bit restrictive here and we might be putting downward pressure instead of upward pressure on inflation,” he said.

Bullard said he was not advocating for an interest-rate cut. “I’m pretty happy where rates are today,” he said. The Fed can afford to “wait and see” how the economy develops.

But he said the Fed “should guard against the downside more.”

While it is uncertain, Bullard said the Fed moved into restrictive territory in December when it pushed interest rates up to a level between 2.25% and 2.5%. Bullard thinks the neutral rate is closer to 2%.

“We’re a little bit restrictive, but I recognize I’m kind of alone on the committee saying that,” Bullard said. The median forecast of Fed participants says the neutral is closer to 3%.

Bullard has been one of the most dovish regional Fed bank presidents, and the FOMC moved sharply in his direction at its meeting last month.

Bullard said the market turmoil in the fourth quarter was a signal that investors thought the Fed was going to tighten too much.

“Markets were taking the Fed on board and taking on the idea the Fed was going to continue to raise rates. I think the market judgment was this was going to lead to lower growth in the future and less inflation in the future,” he said.

At its January meeting, the Fed said it didn’t know if the next move would be to raise or lower rates. Six weeks before, policy makers had penciled in two more rate increases in their “dot plot.”

The St. Louis Fed president suggested the “dot plot” should be scrapped.

“I would very much advocate that [the FOMC] revisit the dot plot and reassess how much forward guidance we want to give in this environment,” he said.

The dot plot was useful when interest rates were stuck at zero and the Fed wanted markets not to worry about preemptive rate increases.

“I think it has become too prescriptive about the future interest-rate path,” he said. “It builds in too much expectation that that is a baseline path from which we have a high bar to deviate, and that is causing the committee problems,” he said.

“I think it caused us problems in December where financial-market turmoil was occurring but we had already signaled we were very likely to move in December, and therefore we got into a meeting where maybe we couldn’t react as appropriately as we might have been able to do if we didn’t have the dot plot there,” he added.

Bullard had argued against the December rate hike.

Bullard said the continual misses of the 2% inflation target has also hurt the Fed’s credibility.

“I do think this has damaged us a little bit, to have continually missed on the low side and continually saying it is due to special factors,” Bullard said.

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