Fed’s Bullard Calls Market Rout `Most Predicted Selloff’ Ever

(Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard said the latest market decline was no surprise given the elevated valuations of technology stocks and absence of any recent drops.

“This is the most predicted selloff of all time because the markets have been up so much and they have had so many days in a row without meaningful down days,’’ Bullard told reporters after a speech Tuesday in Lexington, Kentucky. “So it is probably not surprising that something that has gone up 40 percent like the S&P tech sector would at some point have a selloff. Before there was a selloff, people said repeatedly some day this will sell off.”

Bullard said data Friday showing a surge in average hourly earnings contributed to rising Treasury yields, as traders bet the Fed would boost interest rates four times this year rather than two or three. That may be an incorrect interpretation because other measures of wages are more restrained, and improved pay doesn’t necessarily feed into inflation, he added.

In addition, Monday’s sharp stock market decline in a matter of minutes seemed to come from automated trading, Bullard said.

“What is more interesting is it has been very fast, it’s been possibly aided and abetted by technical trading -- algorithmic trading,’’ he said. Asked if that was a concern, he said, “I’d be interested to see an analysis and see what role that played.”

‘They Look High’

Bullard said he agreed with former Chair Janet Yellen’s analysis that stock prices were elevated.

“They look high compared to historical norms, things like prices to trailing earnings,’’ he said.

While the central bank is sometimes seen as stepping in to protect investors from steep market declines with a “Greenspan put’’ or a “Bernanke put’’ named after former chairs, Bullard said the Fed isn’t focused on helping markets so much as it reacts to the same data.

“The stock market and the Fed are looking at the same thing, which is the future of the U.S. economy and the future of the global economy,’’ he said. “To the extent the markets see something that is different from what the Fed sees, it is important information. It is not so clear to me here that there is a story like that -- that the U.S. economy is not as robust as we thought it was.’’

Dovish Views

Bullard, who doesn’t vote on monetary policy this year, repeated he doesn’t see a need for the Fed to raise rates further with inflation stuck below the central bank’s 2 percent target. “I don’t think we have to be preemptive,’’ he said.

Bullard’s views have sometimes been influential to the Federal Open Market Committee, though in the past two years he has been one of the most dovish Fed officials. Bullard has argued that the U.S. economy has been saddled with persistently low growth, so there is little need to raise interest rates much.

“There is always risk you are switching back to a faster growth regime,” he said. “The evidence so far isn’t there.”

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net.

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Randall Woods

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