NEW YORK (Reuters) - An interest rate cut may be necessary at this point, but that does not mean the Federal Reserve is on a path to dramatically lower rates, St. Louis Fed President James Bullard said on Friday.
Bullard, who argued unsuccessfully for such an immediate cut at the Fed’s last meeting, told reporters it would be “very difficult” at this stage to not deliver.
Cutting rates could reset people’s expectations for inflation and reset relative U.S. government bond prices, or the “yield curve,” to a level more conducive to growth. But it may take time to see, said Bullard, who has endorsed a 25 basis point rate cut at the July 30-31 meeting.
“Signals were that we were highly likely to ease at the July meeting - so now that’s all been priced into the market - so if you try to take that out I think it would be very difficult at this stage,” Bullard said on the sidelines of a conference at Columbia University. “So you might as well follow through and ratify that and then see how the economy develops going forward.”
Bond markets already point to a willingness by investors to revisit their inflation expectations, he said.
But cutting rates does not mean the Fed is necessarily in an “easing cycle,” he said or on a pre-set course to lower rates further. Fed officials, he said, will need to decide what to communicate about what economic data will matter to them when they take their next steps.
Worse outcomes in U.S. trade negotiations or a poor response by inflation to Fed easing could create reasons to ease policy further, he said.
There is no need, Bullard said, for the Fed to revisit current plans to continue letting government debt securities it bought to stimulate the economy after the 2008 financial crisis roll off its balance sheet without buying more bonds to replace them.
The central bank has been under pressure to cut rates dramatically and end that shedding of bonds, most notably by President Donald Trump, who on Friday accused the central bank of a “faulty thought process” and also called for an end to “quantitative tightening,” a reference to the bond runoff.
Bullard previously said he was approached by the White House about a possible seat on the Federal Reserve Board of Governors but that he would not consider leaving his current job. Trump ended up announcing that he would nominate the St. Louis Fed’s research director, Christopher Waller, for the job.
Asked if he would accept a position as chair of the Fed Board of Governors, Bullard said yes.
“Fed chair is, of course, something I’d love to do,” he said. “If I ever got that honor I would certainly take it.”
Reporting by Trevor Hunnicutt; Editing by Andrea Ricci