Fed’s Bullard: Global Trade Tensions, Weak Inflation Reasons Rate Cut “May Be Warranted Soon”

Monday’s comments St. Louis Federal Reserve Bank President James Bullard could be early proof that the Fed has changed their bias to easing after months of toeing the line about an interest rate move in either direction. The key for investors now is the timing of the rate cut. For months, the common phrase was “later in the year”. However, current market conditions may be building a case for a rate cut this month.

Bullard Cites Rising Risk as Reason for Rate Cut

On Monday, St. Louis Federal Reserve President James Bullard became the first Fed official to say recent events may require a central bank response. He cited rising risk to economic growth posed by global trade tensions as well as weak U.S. inflation as key reasons why a U.S. interest rate cut “may be warranted soon”.

In making his comments, Bullard also acknowledged that the Fed cannot respond to every change in the rapidly changing U.S. trade policy with top trading countries and that particular move by the current administration have created “an environment of elevated uncertainty…that could feed back to U.S. Macroeconomic performance” as the global economy slows.

According to Bullard, the Fed “faces an economy that is expected to grow more slowly going forward, with some risk that the slowdown could be sharper than expected due to ongoing global trade regime uncertainty, he said. In addition, both inflation and inflation expectations remain below target, and signals from the Treasury yield curve seem to suggest that the current policy rate setting is inappropriately high.

Aside from weak inflation and other warning signs from the U.S. bond market, “a downward policy rate adjustment may be warranted soon” to help boost inflation expectations and help ease fears that have emerged in bond prices of a sharper-than-expected U.S. slowdown.

“A downward adjustment of the policy rate may help re-center inflation and inflation expectations at the 2 percent target,” as well as provide “insurance” against a sharper than expected economic slowdown, Bullard said, comparable to rate cuts the Fed made in the mid-1990s to nudge along that expansion.

Daly Identifies Overlooked Risks

Mary Daly, President and Chief Executive of the Federal Reserve Bank of San Francisco said on Monday that investors and businesses have to look beyond the trade uncertainties that are creating risks for the U.S. economy right now.

Daly reiterated that the U.S. economy is “in a good place” given that it is close to full employment, inflation is slowing inching up toward the Fed’s 2% target, and the federal funds rate is near “neutral”. She also said the Fed can afford to wait before making its next monetary policy move, adding, “I think patience is the way we should be right now.” Daly is a non-voting member of the Federal Open Market Committee.

Daly also said, “I don’t want us to get too focused on only trade when there are these other looming uncertainties that also need resolution.” In doing so, she was talking about the slowing global economy and the circumstances surrounding how the U.K. eventually leaves the European Union have also affected economic activity.