Bullard says Fed risks sparking recession if rates rise further
St Louis Fed chief is voting member of central bank’s policy-setting panel in 2019
A top Federal Reserve official has warned the central bank risks pushing the US economy into recession if it raises rates further, in comments that may fuel further speculation on how much more tightening is in store this year.
James Bullard, head of the St Louis Fed, said in an interview that rates are currently at a “good level” after nine increases starting in December 2015.
The Fed is “bordering on going too far and possibly tipping the economy into recession” if it pushes rates up further, he told the Wall Street Journal.
Mr Bullard becomes a voting member of the policy-setting Federal Open Market Committee this year after spending 2018 as an alternate on the panel. He is broadly considered to be a “dove” since he has pushed back against the Fed from tightening monetary policy too rapidly.
His remarks come hours before the Fed is due to issue a summary of discussions held during the December FOMC meeting, during which the Fed chose to increase interest rates for the fourth time in 2018.
They will add to the debate among investors on how many times, if any, the Fed will raise rates this year.
Federal funds futures used by market participants to speculate on rates imply a probability of more than 75 per cent that the Fed either holds rates steady this year or cuts them, according to CME Group data. Just a month ago, that figure was less than 50 per cent.
The Fed in December projected two quarter point increases this year, down from a previous forecast of three. Mr Bullard said in the interview that even the revised forecast was still “too hawkish in this environment.”
“Signs of a pullback in global economic growth, particularly centred on a slowdown in China, have altered the balance of risks in the eyes of Fed policymakers,” HSBC chief US economist Kevin Logan said this week.
Mr Logan on Monday cut his estimate for 2019 rate increases from two 25 basis point rises to none, joining other Wall Street economists who have pared back expectations.
“Ongoing trade tensions between China and the US have created downside risks for both the Chinese and US economies,” Mr Logan added.
Donald Trump has complicated the situation further by repeatedly complaining that the Fed’s tightening of monetary policy, meant to avoid inflationary overshoots, has dealt him an unfair hand as he tries to boost the economy.
“Economic numbers looking REALLY good. Can you imagine if I had long term ZERO interest rates to play with like the past administration, rather than the rapidly raised normalised rates we have today. That would have been SO EASY!,” the US president tweeted on Tuesday.