Bullard Says December Fed Hike May Have Slightly Overdone It

(Bloomberg) -- U.S. central bankers may have “slightly overdone it” by raising interest rates in December, though it’s premature to talk about a rate cut, said Federal Reserve Bank of St. Louis President James Bullard.

“Rates are at a good place in the U.S. right now, if anything we are a little restrictive I would say,” Bullard said in an interview with Bloomberg Television Wednesday in Hong Kong. “I am concerned we may have slightly overdone it with our December rate hike but I was pleased that the committee pivoted.”

Bullard, a voter this year on the rate-setting Federal Open Market Committee, has been consistently among the more dovish members of the policy panel, arguing against raising rates in the absence of clear inflation pressures.

Describing low inflation expectations as a concern, Bullard said he argued against the December hike and pegged the neutral level at 2%, “so we are a little bit tight right now.”

While a rate cut would send an important signal that the Fed is determined to hit its inflation target, such a move would be premature at this point, Bullard said.

Investors are betting on a rate cut before the end of the year, according to prices in interest rate futures contracts. The Fed has also been under pressure from President Donald Trump, who has ignored long-standing White House practice of avoiding public discussion of the central bank out of respect for its independence and barraged it with criticism for raising rates last year. Last month he urged it to slash borrowing costs and resume bond purchases.

Not There Yet

“If we cut a quarter point in an environment where the U.S. economy is surprising to the upside again in 2019 that would probably send a signal that we are serious about hitting the 2% inflation target,” Bullard said, adding it would also mean the Fed would be willing to tolerate higher inflation to get the average rate up to 2%.

“I don’t think we are there yet, I think it is premature at this point but this is something that could be done, possibly," he said.

On the U.S. trade war with China, Bullard said farmers are very concerned about rising tariffs, though he added it may take some months before the duties begin to impact Fed policy.

China Boom

“For this to actually affect Fed policy, these tariffs would have to stay on for quite a while, something like six months; at the end of six months if there was still no prospect of a resolution then I think that is the point it would start to weigh on Fed policy,” he said.

China’s economy would "boom" if they agreed a deal with the U.S., the Fed official said.

“It is a great opportunity for China to sign onto international norms on trade policy.”

In later remarks during a question and answer session following a presentation, Bullard downplayed concerns that China would offload its holdings of U.S. treasuries in response to the trade war.

“I don’t really think that this is as much of a threat as it’s made out to be,” he said. "The right way to look at this from a macroeconomic point of view from the Chinese side is that the Chinese re-establish credibility for trade protections within the Chinese economy. That will reassure global investors that China is a great place to invest and to have access to Chinese markets, and really good things would probably happen for the economy going forward.”

U.S. central bankers held interest rates steady at the meeting they wrapped up on May 1 and pledged to be patient in judging future adjustments in policy. Chairman Jerome Powell told reporters following the decision that he didn’t see a strong case to move rates in either direction and that weak inflation readings may be due to transitory factors.

Solid U.S. economic growth has pressed unemployment to a 49-year low but inflation remains well beneath the Fed’s 2% target. Its preferred gauge of price pressures, minus food and energy, rose by 1.6% in the 12 months though March.

--With assistance from Anna Luk.

To contact the reporters on this story: Enda Curran in Hong Kong at ecurran8@bloomberg.net;Rishaad Salamat in Hong Kong at rishaad@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, ;Jeffrey Black at jblack25@bloomberg.net, Michael Heath

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