Fed's Bullard Open to Rate Cut, But Leans Against It
February 28 2020 - 12:47PM
Dow Jones News
By Michael S. Derby
Federal Reserve Bank of St. Louis President James Bullard said
Friday the coronavirus situation has opened the door to a central
bank rate cut, but he still thinks the Fed won't need to take
action if the health scare is contained, as he expects it will
be.
Mr. Bullard also said that just because financial markets have
broad expectations that the central bank will ease policy very
soon, it doesn't mean the central bank is obligated to ratify those
views with cuts to the central bank's target federal-funds
rate.
"Further policy rate cuts are a possibility if a global pandemic
actually develops with health effects approaching the scale of
ordinary influenza, but this is not the baseline case at this
time," Mr. Bullard said in materials prepared for a presentation in
Fort Smith, Ark.
He told reporters after his speech: "I wouldn't want to prejudge
the March meeting. Obviously, the situation is very fluid, and we
are going to want to monitor events right up until the meeting."
But he added, "Focusing on central banks is probably not the best
idea here. The best idea is to focus on public health."
Mr. Bullard was a voting member of the Federal Open Market
Committee in 2019 but isn't this year due to the annual rotation of
regional Fed bank presidents. He was an early and strong supporter
of rate cuts last year, and in his speech, he said the U.S. economy
is still benefiting from that change in policy, which is also
helping support the economy amid the current uncertainty and market
woes.
The Fed "is in a good position because of previous policy rate
cuts designed to insure the economy against adverse shocks," Mr.
Bullard said in his speech. "Policy rate decreases have an effect
on the U.S. economy with a lag, so last year's rate reductions are
likely to continue to have an influence as the coronavirus tragedy
unfolds," he added.
The futures market for the federal-funds rate now sees zero
chance of a steady Fed at the March meeting. Compared with the
current target-rate range of between 1.50% and 1.75%, the market
put a 55% probability on a move to between 1.25% and 1.50% Friday
morning, and a 45% probability on a bigger move down to between
1.00% and 1.25%.
It is rare for markets and the Fed to be so far out of
alignment, especially with the next FOMC meeting looming into view
on March 17 and 18. But so far, during the sharp stock market
losses and general market upheaval, Fed officials haven't been
ready yet to say more rate cuts are needed. Dallas Fed leader
Robert Kaplan, an FOMC voter, said on Fox Business Network Friday
that "I've said up to now I thought it was too soon to make a
judgment, but I'll be prepared to make a judgment and have a
judgment on what I think we ought to do as we go into the March
meeting."
Speaking with reporters, Mr. Bullard laid out how he could see
the Fed lowering rates in response to the coronavirus situation.
"If you thought that this was going to slow U.S. growth materially
this year, and the Fed took some action to try to bolster growth
this year, then in that sense, we can react to this." But he noted
that thus far there has been no big downgrade of the U.S. growth
outlook.
Mr. Bullard took a cautious eye toward market developments and
said that while plummeting bond yields are offering support to the
economy, it isn't clear whether stock investors are overdoing it
with their huge selloff.
Mr. Bullard told reporters investors are pricing in "a
debilitating global pandemic. But I would encourage everyone to ask
themselves, is that really the bet you want to make, that this will
be a debilitating global pandemic?" He added, "Markets might be
overestimating the probability of a global pandemic, but they are
certainly free to bet as they wish." He also said he expects asset
prices to recover as soon as it becomes clear the coronavirus
situation is a transitory issue.
But he added that when it comes to whether investors have lost
their bearings, "irrational is in the eye of the beholder. I think
it's very legitimate markets want to take this seriously, they want
to war-game out what could happen, and there is some serious
downside risk here and they're trying to price that in."
In the speech, Mr. Bullard also said the very sharp decline in
Treasury yields seen over recent days -- the 10-year note yield hit
a record low as investors sought a safe place to park their money
-- should also help buoy the economy. "Longer-term U.S. interest
rates have been driven lower by a global flight to safety, likely
benefiting the U.S. economy," he said.
The Fed lowered rates three times in 2019 as it sought to offset
risks to the U.S. economy from trade policy uncertainty and slowing
global growth. Mr. Bullard reiterated in his presentation that the
shift in monetary policy by the Fed has had a stimulative impact
beyond the actual scope of the rate cuts, given how other asset
prices reacted. That stimulus is still affecting the economy and
will help the U.S. navigate the current situation of uncertainty,
he said.
Mr. Bullard acknowledged the uncertainty of the situation
surrounding the coronavirus, which causes the illness Covid-19 and
has already brought substantial disruptions to China's economy.
"Global economic growth is likely to slow temporarily, with much of
the slowdown centered in Asia," he said.
Write to Michael S. Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
February 28, 2020 12:32 ET (17:32 GMT)
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