Fed member Bullard cites weak growth for caution on rate rises
Soggy US growth in the early months of the year has raised new questions over the next Federal Reserve interest rate rise as policymakers balance evidence of strong corporate hiring against softer activity and inflation numbers.
James Bullard, president of the St Louis Federal Reserve, said in an interview on Friday that weak first-quarter growth numbers were “somewhat concerning” and supported arguments for patience as the central bank assessed the pace at which it lifts rates.
He spoke a day after Dennis Lockhart, president of the Atlanta Fed, signalled he would no longer be pushing for an interest rate move this month as soft spending and price growth “gives me pause”.
Janet Yellen, Fed chair, last month sent a strong message that she wanted to proceed cautiously given the overseas risks confronting the central bank.
A rate move at the Fed’s April 26-27 meeting now appears to be off the table, and some analysts question whether the central bank will be ready to pull the trigger on a second rate increase as soon as June.
Mr Bullard, who votes on rates this year, said one explanation for the poor first-quarter numbers could be seasonal factors that in the past have tended to suppress output data at the beginning of the year. However, evidence of a strong second-quarter bounceback was lacking so far, he cautioned.
“The jobs report we got was very strong but the GDP tracking has moved down substantially for the first quarter and to some extent for the second quarter,” he said. “We are on track to continue normalising [rates] this year, but it certainly gives us room for manoeuvre and we can be patient and go gradually.”
The Atlanta Fed’s GDPNow model estimates first-quarter GDP growth at just 0.3 per cent. This extends the long-running conundrum of punchy jobs growth combined with damp GDP data, Mr Bullard said, adding his bank’s model had been repeatedly indicating that 3 per cent growth was “just around the corner” and this was not happening.
While the median forecast from policymakers is for two increases this year, investors are expecting a shallower path of rate rises.
Recent data disappointments have included slow March retail sales and inflation numbers, as well as weak factory figures on Friday. Analysts at Oxford Economics say there were increasing odds that GDP growth for 2016 could fall below 2 per cent, down from 2.4 per cent in 2015.
Political risks are also hanging over Fed decision-making this year, with the June Federal Open Market Committee meeting occurring just before the UK’s referendum on whether to exit the European Union.
While some investors argue the Fed would be reluctant to lift rates just ahead of an event that the International Monetary Fund sees as one of the biggest global risks this year, Mr Bullard rejected the idea that it stands in the way of a June move.
“I would strenuously push back against the idea that we are going to sit on the sidelines because the UK is going to vote one way or another on that,” he said. The Fed cannot afford to wait for everything in the world to be “just right” before making the best policy decision for the US, he said.