US interest rates kept too low for too long could be risky: James Bullard

0

BEIJING: US interest rates being kept too low for too long could cause financial instability in future and stronger marketexpectations for a rate rise are “probably good”, St. Louis Federal Reserve PresidentJames Bullard said on Monday.

A relatively tight labour market in the US may also exert upward pressure on inflation, raising the case for higher interest rates, Bullard added. His comments come as financial markets have increased expectations for a US interest rate hike in June or July and a range of policymakers are now stating that a rise is firmly on the table for the next policy meet in June. “I do worry that keeping rates too low for too long could feed into future financial instability even if it doesn’t look like we’re in that situation today,” Bullard, a voting member of the Fed’s policy-setting committee, told reporters.

Market assessment for a Fed rate rise had been close to zero, and the idea it has come off zero is “probably good”, he said. “It does depend on the data and it’s certainly not 100%, but it’s not zero either. Some probability in between is the right thing to think at this point.”

Bullard said the US labour market was performing well and global headwinds that had partly prevented the Federal Reserve from raising rates again may have waned.

The Federal Open Market Committee has laid out a data-dependent “slow normalisation” of rates, he said, thereby the nominal policy rate would gradually rise over the next several years provided the economy evolves as expected. “Labour markets are relatively tight. This may put upward pressure on inflation going forward,” he said. “This is an important factor supporting the FOMC view on the expected path of the policy rate.”

Expectations for a June rate hike rose last week following minutes from the central bank’s April policy meeting released on May 18 that showed Fed officials felt the U.S. economy could be ready for another interest rate increase.

A possible British exit from the European Union in a vote next month will not affect the Fed’s upcoming decision on rates, Bullard said. Williams sees more aggressive rate hikes next year: The Federal Reserve will likely tighten policy a bit quicker in 2017 than this year, by perhaps one or two more interest rate hikes, a top Fed official said on Monday, noting the decision whether to hike in mid-June will hinge on economic data before then.

San Francisco Fed President John Williams said Fed forecasts from March still largely stood up: “Over the rest of the year two or maybe three rate increases, maybe one or two more (than that) next year so maybe three or four next year — I think that’s still about right,” he said at the Council of Foreign Relations. “It will depend on the data,” he added. “We still get another month’s data before the June (14-15 policy) meeting and we want to analyze that and come to our conclusion.”