Federal Reserve policy isn’t as far away from a stance where it would not be boosting the economy as many believe, once the central bank’s plans to shrink its balance sheet at a fast pace is factored into the equation, said St. Louis Fed President James Bullard, on Tuesday.
The Fed’s latest estimate of a “neutral” policy rate is 2.5%. At the moment, the Fed has rates close to zero — so on the surface it is 250 basis points away from neutral.
But in an interview with Reuters that was broadcast on its Twitter page, Bullard said actually policy “is not that far from breaching neutral.”
Bullard said that he thinks the Fed will launch “some pretty significant balance sheet reduction” pretty soon — at a faster pace than in 2017-19 and the runoff of its portfolio was removing accommodation in another form.
“I think it is important for listeners here is that we’re cognizant of the inflation issue, we’re moving on the policy rate, but we’re also going to move on the balance sheet. And so we’re not that far from breaching neutral — if you are willing to consider both of those acts together,” Bullard said.
In addition, the yield on the 2-year Treasury note has already moved up 100 basis points, he said.
“I think those factors make me confident that we’re not behind the curve. We’ve actually got a good policy in place — maybe it doesn’t look like it, because we actually haven’t moved yet,” he said.
“This policy will do a good job of bringing inflation under control,” he added.
With all the policies under way, it won’t take long for the Fed to get its adjusted policy rate up to 1.75% or 2%, he argued.
Bullard said it is an open question whether the Fed will need to take its policy rate above neutral — which would help to contract GDP growth.
The St. Louis Fed president is a voting member of the Fed’s interest-rate committee this year.
Bullard seemed reluctant to support a half-point rate hike at the Fed’s next meeting in March, saying he didn’t think it would help.
The St. Louis Fed president was upbeat about the outlook for the U.S. economy, forecasting GDP growth above 4% and the unemployment rate falling below 3%.
“All the businesses I talk to are doing very, very well and they’re scrounging around for workers,” he said.
“I think the upcoming job report won’t be very good because of omicron but don’t be fooled, this is quite a strong economy and a very strong labor market,” he said.
Stocks DJIA, +0.86% SPX, +0.73% were higher on Tuesday after a number of earnings reports were released. The yield on the 10-year Treasury note TMUBMUSD10Y, 1.800% rose above 1.8%.