St Louis Fed boss James Bullard says December hike still ‘reasonable’

Despite the uncertainty of a Trump presidency, the St Louis Fed boss says a December hike still looks “reasonable”.

The Federal Reserve building in Washington, DC. Picture: Andrew Harrer/Bloomberg.

Federal Reserve Bank of St. Louis President James Bullard said Thursday he remains on board with raising rates next month and explained it will take some time to understand the economic implications of the unexpected election of Donald Trump to be president.

“Our view has called for a single rate increase. I think December would be a reasonable time to implement that increase,” Mr Bullard told reporters after a speech in St. Louis.

Mr Bullard is a voting member of the Federal Open Market Committee. The panel meets next month in a gathering many had expected to result in a short-term rate rise, although that gathering is now clouded by the unexpected victory of Mr Trump in the US presidential election.

Mr Bullard is considerably more dovish than a strong majority of his colleagues and has since the summer said the Fed needs but one more rate rise in what’s now a 0.25 per cent to 0.50 per cent short-term rate target to get where it needs to be. Even a sceptic of raising rates like Chicago Fed leader Charles Evans sees around three more rate rises happening by the end of 2017 if the economy performs as he expected.

Much of Mr Bullard comments after his speech dealt with the aftermath of the unexpected win of Mr Trump and Republicans’ sweep of Congress. He noted one-party control could break the gridlock that has beset Washington over recent years, and he said he’d be happy to see programs put in place that would help boost the economy’s productivity. Infrastructure spending might also be welcome, Mr Bullard said.

The policy maker also addressed fears the Fed could face challenges to its independence under Mr Trump, who has offered conflicting criticisms of central bank policies.

“I think Fed performance has been pretty good” and the central bank has its independence, but that said, “it’s up to Congress as to how they want to proceed,” Mr Bullard said. He added he thinks there will be bigger things for legislators to deal with than central bank structure, although he also said that once Chairwoman Janet Yellen’s term as Fed leader is up in 2018 it would be customary for the new president to get to pick his own person.

Mr Bullard also said that even with new members almost certain to join the Fed, there will still be considerable continuity with the past.

In Mr Bullard’s prepared remarks, he said his view central bank policy needs to keep rates low well into the future isn’t as much in conflict with some monetary policy rules as some think. Mr Bullard has found himself at odds with those who believe short-term rates, guided by rules, should be significantly higher than where they are now.

The best known of these benchmarks is the so-called Taylor Rule, which indicates an ideal level of short-term rates based on inflation levels and assumptions about the economy’s growth pace trend. Taylor rules come in many flavours and many central bankers have said they are an important guidepost for policy, but not a complete one.

Taylor rule fans generally believe short-term rates should be significantly higher than the current range now targeted by the Fed. Even as the central bank moves closer to its next rate rise, some rules supporters worry the Fed has gotten behind the curve in its efforts to keep inflation under control.

Mr Bullard repeated in his prepared materials that “low interest rates are likely to continue to be the norm over the next two to three years.” This low rate is driven by things like weak productivity rates and investors’ desire to own securities like low-risk Treasury bonds. That is depressing borrowing costs and monetary policy must take account of that, he said.

For central bankers, that means “the policy rate should be expected to remain exceptionally low over the forecast horizon,” Mr Bullard said.

Mr Bullard also said in his speech labour market performance has been “good” and inflation is essentially where it needs to be.

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