LONDON–A top Federal Reserve official said Tuesday that interest-rate expectations in financial markets need to be better aligned with those of Fed officials, warning that reconciling those views could cause “potentially violent” market disruption.
James Bullard, president of the Federal Reserve Bank of St. Louis, told reporters in London that investors are penciling in a later move in interest rates than he expects and a slower pace of tightening in the months and years ahead.
His remarks underscore the potential pitfalls that await Fed and other central bank officials as they tiptoe towards calling time on years of ultra-loose monetary policy.
Mr. Bullard said investors have misread recent changes to the Fed’s interest-rate forecasts as a signal that members of the Federal Open Market Committee, which sets monetary policy, have become more pessimistic about the economic outlook.
“I’m not anymore dovish than I was,” Mr. Bullard said. He explained he had wanted the Fed to raise rates in March but once that date passed he simply switched his preference to June. That doesn’t mean he’s gloomier about the outlook, he said.
“People have to be careful when interpreting these dot movements,” he said, referring to Fed charts that show officials’ interest-rate forecasts as dots on a grid.
Mr. Bullard said investors’ rate expectations need to be better aligned with what the Fed’s policy-setting panel is expecting, adding he’s hopeful that markets and the committee “can come to a meeting of minds” over what the future path of interest rates should look like.
But he added there’s a risk that achieving that may involve a repeat of the summer 2013 “taper tantrum,” when financial markets swung wildly in response to Fed signals about winding down its bond-buying program.
“There’s going to be a reconciliation and that could be violent,” he said.
Earlier, in a speech to London’s City Week conference, Mr. Bullard said he expects the economy to recover in the second quarter following a soft start to the year as low gasoline prices fuel consumer spending. He said the strength of the dollar doesn’t pose a major impediment to growth.
He added the European Central Bank’s decision to begin buying government bonds is driving down bond yields in the U.S. too, keeping a lid on corporate and household borrowing costs.
“These facts put us in a position for normalization of U.S. monetary policy in 2015,” Mr. Bullard said.
He added raising rates soon will help ensure the Fed doesn’t have to raise them faster in future years to contain inflation.
“If we don’t start normalizing policy now we might be in a position where we are badly behind the curve two years from now,” he said.
Mr. Bullard isn’t currently a voting member of the Fed’s policy-setting Federal Open Market Committee.
Fed officials earlier this month signaled they are open to raising interest rates later this year by dropping their assurance that they will be “patient” on tightening policy, a move Mr. Bullard hailed Tuesday as an excellent decision.