Whoa, not so fast, St. Louis Fed President advised today on CNBC. Last week’s decision by the Federal Reserve to hold off on raising interest rates for the first time in nine years was widely perceived as a warning that the US economy is weakening and so tighter monetary policy isn’t on the near-term horizon. But Jim Bullard wants the crowd to dial down the revival in dovish sentiment and consider the finer points of the hawkish perspective. “There’s a powerful case to be made that it’s time to normalize interest rates,” he insists.
According to Bullard,
The goals of the committee have essentially been met. Unemployment is 5.1% and inflation, which is being driven down by oil right now, but if you strip that out and look at the Dallas Fed trim mean inflation’s about 1.6% year over year. That is about as close as we’ve been to our goal variables in 50 or 60 years. So the prudent thing to do is to start to inch your policy levers back to some kind of normal readings.
That’s certainly a different spin than the one that came out of Janet Yellen’s press conference last week. After all, if you say that the Fed’s mandate—low inflation and full employment—is as near as it’s been in the past half century, well, that’s a case tightening if ever there was one.
Bullard, of course, isn’t a voting member of the FOMC at the moment. If he had been on team Fed, he says he’d have been a dissenting voice in last week’s near-unanimous vote to leave the Fed’s policy rate unchanged at the current zero-to-0.25% target.
Is that a clue for thinking that the prospects for a rate hike at next month’s FOMC meeting (Oct. 27-28) are back in play? So it seems if you gorge on the hawkish meal that Bullard’s serving.
The Treasury market is inclined to agree at the moment. After last Thursday’s no-hike Fed decision, the 2-year yield—the most sensitive spot on the yield curve for rate expectations–tumbled sharply to 0.69% on Friday, based on Treasury.gov data. Two days earlier, on the eve of the Fed announcement, the 2-year yield had popped up to a new four-year high of 0.82%. At 1:30 pm New York time today, the 2-year yield has reversed course again, rising sharply off of Friday’s low to 0.71%, according to Bloomberg.
Meanwhile, oil is higher too, with the US benchmark (WTI) up more than 3% to over $46 a barrel as of this writing. For today at least, a key weight on inflation (according to Bullard’s analysis) looks poised to dispense a bit less disinflationary pressure.
One day a trend does not make, of course. But until or if the next Fed head (or macro report) sways the crowd’s attention in a different direction, the 2-year yield and oil prices are on the short list of variables to monitor for second-guessing the odds for an October surprise in monetary policy.