St. Louis Federal Reserve Bank President James Bullard said Friday he was projecting a “late 2014” hike in the federal funds rate in December when he and fellow members of the Fed’s policymaking Federal Open Market Committee were making their economic and funds rate forecasts, but said he “will have to reconsider” that forecast at the March FOMC meeting.
Bullard made clear that recent weaker economic data have made him more inclined to push his expected date for raising the funds rate into 2015 as he talked to reporters following a luncheon address at the St. Louis Forum.
Before the FOMC raises the funds rate from near zero, where it’s been since December 2008, Bullard said the Committee’s current exit strategy calls for first “passively” reducing the size of the Fed’s balance sheet – and the amount of bank reserves – by discontinuing the policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities into agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.
On a day when the Fed released 2008 FOMC transcripts, Bullard suggested the Fed made a mistake of cutting the funds rate target to zero to 25 basis points. The European Central Bank was wiser in deciding to “save the zero rate card,” he said.
All Federal Reserve Bank presidents and Federal Reserve Governors contribute three-year economic projections and funds rate forecasts to the FOMC’s quarterly Summary of Economic Projections (SEP). When the last was released on Dec. 18, two of 17 participants saw the earliest rate hike taking place in 2014, with another 12 seeing no rate hike until 2015, and three seeing none until 2016.
Bullard revealed for the first time that he was one of the two FOMC participants who foresaw a 2014 rate hike in December and said he made that forecast because he was “more optimistic” than many about the outlook for economic growth and employment. He said he had previously expected the first rate hike to come in 2015.
However, with the March meeting less than a month away, Bullard said, “I definitely will have to reconsider at this meeting” whether the first rate hike will come in late 2014 or in 2015.
“Even in December, it was a close call,” he said, adding that “if it moves back a quarter” it makes little difference.
Bullard said recent weaker economic data have forced him to reconsider, but he emphasized he still has “a pretty optimistic outlook,” because “the fundamentals look good…”
He said the economy, and in turn monetary policy, is getting “closer to normal.”
“We have to start to get out of the mode of emergency policy” and think about making monetary policy “more normal,” Bullard said.
“We’ve still got a ways to go” to normalize monetary policy, he went on, but “we need to change the mindset from what it’s been the last five years.”
En route to the first rate hike, Bullard said the FOMC would likely first allow “passive” shrinkage of its balance sheet, in keeping with exit strategy “principles” developed by the FOMC several years ago. He said those principles have not been changed in that regard, although outright asset sales have been pushed further out in the process.
“That’s the sequence most people have in mind at this point,” Bullard said, although he said the exit strategy is subject to change. He did not say how long before the first rate hike the Fed would discontinue the reinvestment and rollover policies.
Bullard said that “as we get closer to a normal economy we should also get closer to normal monetary policy. A normal monetary policy doesn’t have thresholds (and) doesn’t have quantitative easing.”
He repeated calls for a change to “more qualitative” “forward guidance” on the path of the funds rate.
Despite recent economic softness, Bullard said he believes the unemployment rate could “get below 6%” this year. He said he also expects inflation to rise this year but probably not reach the Fed’s 2% target in 2014.
If inflation does not return to target, he said the FOMC will have to “address” that.
In his informal luncheon address and in questions thereafter, Bullard predicted new Fed Chair Janet Yellen will “surely be tested” in 2014, even as he projected a “very good” year for the economy.
Bullard did not say what kind of test he expects Yellen, who succeeded Ben Bernanke as Fed chief on Feb. 1, to face.
After saying Yellen has “a great background” and “will do an excellent job,” he said “she’ll surely be tested here in the first year here…”
“I’m not sure quite what the test will be,” he said, but “she will need to give her all the support we can.”
He told his audience that, even though the Fed is scaling back its large-scale asset purchases, it is “still buying a lot.” He said continued “tapering” remains on track at coming meetings of the FOMC.
Bullard, not an FOMC voter this year, said that following the conclusion of the Fed’s third round of “quantitative easing,” the FOMC is likely to keep the federal funds rate near zero for a good while, even if the unemployment rate goes below the FOMC’s 6.5% “threshold” for considering rate hikes.
With the unemployment rate already down to 6.6%, Bullard reiterated that the FOMC will need to alter its “forward guidance” on the path of the funds rate.
He estimated the “full employment” rate at 6%.
Bullard observed that after a 3.5% average growth rate in the second half of 2013, economic data early this year “have been soft.”
“That’s probably due to the weather,” he said, “but I don’t really know.”
Bullard said the recent economic weakness “does not deter my outlook for the year; it’s a very good outlook.”
“We’re in much better shape than we were,” he said, noting that “a lot” of household deleveraging has “faded away” and “political wrangling” over the federal budget is in abeyance.
Bullard contrasted the U.S. economy’s performance to that of Europe, noting that since 2009, the U.S. unemployment rate has fallen from 10% to 6.6%, while the unemployment rate in the euro zone was holding steady 12% in December.
In other comments, he warned raising the minimum wage “would probably increase unemployment,” particularly among young people.