More trouble ahead for the U.S. dollar: Agilith's Patrick Horan
Federal Reserve Bank of St. Louis President James Bullard said an “insurance cut” of 25 basis points to interest rates would be enough to protect against a sharper-than-expected slowdown in economic growth.
“I think 50 basis points would be overdone,’’ Bullard said in an interview with Bloomberg Television’s Kathleen Hays from the bank’s headquarters. “I don’t think the situation really calls for that. But I would be willing to go 25.’’
U.S. stocks extended losses, while the dollar and Treasury yields rose, after the comments by Bullard and his boss, Fed Chairman Jerome Powell -- who at a separate event Tuesday stopped short of signaling an imminent rate cut. Markets have been pricing in a reduction of almost 50 basis points next month.
The Federal Open Market Committee held its benchmark just below 2.5 per cent last week, while indicating a readiness to lower it for the first time in more than a decade because of “uncertainties” over the economic outlook. Bullard was the sole dissenter, backing a 25-point cut.
The Fed is seeking to extend a U.S. economic expansion that’s about to become the longest ever. Powell said Tuesday that the downside risks have increased recently, reinforcing the case for lower interest rates.
Growth is expected to slow to less than 2 per cent in the second half of this year, and “that isn’t the end of the world,’’ Bullard said.
“Inflation is running low, inflation expectations are running low, and you would like to get those back up to 2%,” he said. “I don’t think you have to take huge action to get this. This is more in the realm of insurance.’’ Fed policy makers are next scheduled to meet July 30-31.
Bullard’s dissent was the first since Powell’s tenure began in February 2018.
Also arguing for a cut at last week’s meeting was Minneapolis Fed President Neel Kashkari, who doesn’t have a vote on interest rates this year.
Kashkari said he favored a half-percentage point cut, and that he “argued we should also commit to not raising rates from the new lower level until we see core inflation sustainably reach our target.’’