February 3, 2015 / 5:36 PM / 4 years ago

UPDATE 1-Fed's Bullard calls for deleting 'patient' from rate guidance

(Adds Bullard views on bank breakups, inflation expectations, other quotes)

By Michael Flaherty

Feb 3 (Reuters) - The Federal Reserve should delete the word “patient” from its next policy statement, a top Fed official said on Tuesday, which would give the central bank more flexibility on when to raise interest rates.

St. Louis Fed President James Bullard, speaking on a panel of economists at the University of Delaware, also downplayed the Fed’s reference to international developments in its last policy statement, and called for breaking up big banks.

Earlier this month, the Fed said for the second time since December that it would remain “patient” when deciding to raise interest rates, a more hawkish view compared to its guidance through most of last year.

Investors are watching closely for when “patient” is removed for a sign of when the Fed is ready to hike.

“If it was me, I would take it out to provide optionality for the following meeting,” said Bullard, referring to “patient.”

Bullard is a well-known hawk who has repeatedly said the central bank has already been too patient, and that it should begin raising rates later this quarter. Bullard is not a voting member on the Fed’s policy setting committee.

Bullard downplayed the Fed’s nod to international developments in its latest policy statement, saying it was simply an acknowledgement of constant U.S. central bank discussion about the potential impact of global market events.

Some investors took the reference to mean the Fed would delay its timing for lift-off, but Bullard said he viewed the insertion as carrying less significance than the market gave it.

One of the panelists at the Delaware Economic Forecast event quipped that the issue of certain financial institutions being too big to fail has not been resolved, and he was unsure if the Fed knew what to do about it.

“I know what to do, we need smaller institutions,” Bullard replied. “I would split them up.”

But Bullard also said that the time for restoring the Glass-Steagall Act, which had separated investment banks and commercial banks, had probably passed and was not the best route going forward, given how complex markets have become and how integrated the institutions are.

Bullard repeated his view that the Fed needs to raise rates sooner and then move gradually higher after that. He also said that the oil price plummet is distorting market-based inflation expectation measures, and that these measures should be set aside until energy prices stabilize.

Reporting by Michael Flaherty; Editing by Meredith Mazzilli

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