St. Louis Federal Reserve Bank President James Bullard Thursday predicted that going forward it will become “more and more difficult” to describe the credit markets as still being impaired, which in turn will mean less reason for the Fed to maintain downward pressure on real interest rates.
In remarks prepared for the Council on Foreign Relations in New York, Bullard focused the bulk of his comments on the debate around the Fed’s actions and its impact on income inequality, and did not venture into current economic conditions or monetary policy.
Following the 2008 financial crisis, Bullard said the Federal Open Market Committee decided to buy large amounts of long-term Treasury securities and mortgage bonds in order to push real yields lower and repair the damage caused by the meltdown.
“As time passes, however, it becomes more and more difficult to argue that credit markets remain in a state of disrepair, and thus harder and harder to justify continued low real rates,” Bullard said. He is not a voter on the FOMC until 2016.
Earlier Thursday, in an interview on the Fox Business Network, Bullard said he sees underlying strength in the U.S. economy and projected the first interest rate increase will occur at the end of the first quarter of 2015.
Bullard also cautioned that the faster-than-expected fall in unemployment and the northward march in inflation means the Fed is “closer” to achieving the Fed’s objectives than many, including policymakers, expected.
In his speech, Bullard also examined the question of whether a higher inflation target would help or hurt the poorest Americans, and concluded that given the major role cash plays in their financial life, “higher average inflation is going to damage the well-being of these households directly.”
He added that, “A higher average inflation rate directly reduces the value of their financial wealth. While it is true this part of the population tends to have longer and more frequent spells of unemployment, monetary policy cannot influence the average unemployment rate in the medium- or long-term.”
Fed policy has also been accused of boosting the stock market, and in turn aiding wealthy Americans, while leaving the poor behind.
Bullard agreed that the FOMC’s asset purchases “have indeed” influenced equity prices, but took issue with the accusation that the Fed has contributed to greater income inequality.
“Actual equity prices were well below normal by conventional valuation metrics in 2008 and 2009, and they have recently returned to more standard valuations. To me, this suggests that quantitative easing had no medium-term implications for the U.S. income or wealth distribution – it is only as good or bad as it was before the crisis,” he said.