Fed St. Louis President Warns Against Rate Hikes

On Tuesday, Federal Reserve Bank of St. Louis President James Bullard said that the Fed will have difficulty raising interest rates significantly beyond the settings of its Japanese and European counterparts which are still pursuing accommodative policies.

"It is hard for U.S. rates to get too far out of line with the global rate situation, and obviously both the (Bank of Japan) and the (European Central Bank) are continuing very accommodative policies," Bullard told reporters. Previously, he flagged the need for caution in raising rates. "Is it constraining? It is in the sense that there is a global equilibrium of rates and if you get too far out of line things have to happen, exchange rates have to move, and other things have to happen."

Furthermore, he said that the US interest rates may have already reached the ‘neutral’ level that neither encourages nor discourages economic activity. He reiterated his view that the Fed does not need to raise interest rates further because expectations for inflation are low.

On May 2, the Federal Reserve held interest rates steady in a target range between 1.50 and 1.75 percent.

If the current policy rate is at neutral, "it may not be necessary to change the policy rate" in order to keep the economy close to or at the Fed's goal, Bullard said.

Meanwhile, the US central bank is expected to raise rates within the next month, and continue a series of increases until possibly the middle of 2018.

Yield Curve Flipping

Dallas Fed President Robert Kaplan and Atlanta Fed President Raphael Bostic also showed concern over a potential flip on the yield curve.

Bullard said, “It is unnecessary for the FOMC (Federal Open Market committee) to be so aggressive as to invert the yield curve. The U.S. nominal yield curve could invert later this year or in 2019, which would be a bearish signal for U.S. macroeconomic prospects.”

During the panel’s meeting on May 1-2 released last week, the FOMC is likely to raise rates ‘soon’ if the economy performs as expected. Investors expect a hike in June, though the outlook for increases in the second half of the year is uncertain.

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