St. Louis Fed President James Bullard warned the current policy rate setting is “inappropriately high” in the remarks presented to the Union League Club of Chicago on Monday. And, a rate cut could be coming soon to help “re-center inflation and inflation expectations” and provided “insurance” in case of “sharper-than-expected slowdown.”
He noted that US GDP growth in 2019 is expected to be a a lot slower than 3.2% over the last year. And more importantly “to the extent global trade uncertainties have become more severe, this slowing may be sharper than previously anticipated”.
Additionally, he noted that yield curve inversion has become more pronounced recently, with 10-year yield below federal funds rate. And, “Financial markets appear to expect less growth and less inflation going forward than the FOMC does, a signal that the policy rate setting may be too restrictive for the current environment.”
So, “a downward adjustment of the policy rate may help re-center inflation and inflation expectations at the 2% target, and simultaneously provide some insurance in case the slowdown is sharper than expected,” Bullard said, adding, “Even if the sharper-than-expected slowdown does not materialize, a rate cut would only mean that inflation and inflation expectations return to target more rapidly.”