(Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard called current U.S. economic conditions “quite good” and said the goal of the central bank’s policy framework review should be to avoid a Japan-style deflationary trap.
“Unemployment is near a 50-year low. Inflation is low and stable,” Bullard said in an audio recording posted on the bank’s website Wednesday. “The economy’s not in recession, so it’s actually a good time to do strategic thinking for the future.”
The review has been underway for months and Bullard will host a Sept. 4 “Fed Listens” event at his bank to get community feedback.
Bullard did not directly discuss the current economic outlook, which has spooked investors amid deepening gloom and an escalating U.S.-China trade war. Stocks slumped and yields on two-year U.S. Treasuries rose above 10-year notes for the first time since the financial crisis. An inverted curve is widely viewed as a signal of a recession in future quarters.
Bullard dissented in June in favor of a quarter-point rate cut, which the Federal Open Market Committee delivered in July. Last week, he forecast just one more rate reduction this year, adding it’s premature to decide on action for September. Markets are pricing in rate cuts at each of the three remaining meetings this year.
While Bullard didn’t comment on his current view of monetary policy, he said too-low inflation should be a central focus of the review.
“The question is whether you might get stuck at an inflation rate that’s lower than your inflation target,” Bullard said. “Certainly, the case in Japan where their policy rate hasn’t been above 50 basis points in 20 years and their inflation rate has been low or negative over that horizon. So, how can we stay out of that kind of trap, I think, is a key issue for this review.”
Bullard has favored an approach that allows for overshooting the central bank’s 2% inflation target to compensate for undershooting in past years. The U.S. inflation rate has been below the goal for most of the past seven years.
Negative interest rates have been deployed in Europe and Japan but haven’t been “as popular” in the U.S., but could be looked at, Bullard said.
His comments broke a mostly quiet August for Fed speakers, with no officials scheduled to give speeches until the annual Kansas City Fed monetary policy symposium in Jackson Hole, Wyoming, next week, where Fed officials typically give interviews. The schedule of speakers hasn’t been released.
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