ST.LOUIS (Reuters) - The disconnect between the market’s view on the Federal Reserve’s rate hike path and the central bank’s own view is concerning, a top Fed official said on Thursday.
St. Louis Federal Reserve Bank President James Bullard echoed the view shared by the Fed’s policy-setting committee that investors and the central bank are far apart on their view of where interest rates will be at the end of next year.
Minutes from the Fed’s latest policy-setting meeting showed that in addition to the market disconnect, the central bank is worried about the rising U.S. dollar, global economic uncertainties and signs that long-term inflation expectations are moving lower, not higher as the Fed is hoping.
Bullard stood in stark contrast to those points, saying the inflation gauges, if anything, have been rising. He added that Europe’s economic woes were a concern but not as worrying as the Fed’s own disconnect from the market at home.
“In my mind, the markets are making a mistake,” said Bullard, who is not a voting member on the policy committee, after a St. Louis Fed research conference. “I have been concerned that the market path of interest rates is lagging behind what the committee is thinking.”
For the end of next year, the Federal Reserve’s median projection for rates is 1.375 percent, with the first hike coming around June or July. The end-2016 projection has moved up to 2.875 percent from 2.50 percent.
By contrast, December 2015 federal funds futures imply an interbank lending rate of 0.59 percent at the end of next year.
“When there is a mismatch it doesn’t end well,” Bullard said.
The Fed has held benchmark overnight rates near zero since December 2008 and has more than quadrupled its balance sheet to $4.4 trillion through a series of large-scale bond purchase programs. The third so-called quantitative easing program, known as QE3, is set to end this month.
Bullard repeated his call for the Fed to change its interest rate guidance to better reflect economic progress and the end of the bond-buying program.
U.S. employers ramped up hiring in September and the jobless rate fell to a six-year low, statistics that vindicate Bullard’s call to raise rates in the first quarter of next year, he said.
The dollar has strengthened steadily this year amid speculation that the Fed is preparing to lift rates. The move higher has prompted several Fed officials to note its potential impact on monetary policy. The currency may stymie efforts to spur growth and boost inflation, Fed Bank of New York President William Dudley said last month.
Bullard downplayed those concerns, which also appeared in the Fed’s minutes.
“I’m not worried about the dollar’s strength having an impact on inflation,” he said.
Reporting by Michael Flaherty, additional reporting by Richard Leong; Editing by Meredith Mazzilli