Bullard at Fed: Let rate shifts be reactive

James Bullard, president of the St. Louis Federal Reserve Bank, is shown in this photo.
James Bullard, president of the St. Louis Federal Reserve Bank, is shown in this photo.

FORT SMITH -- Federal Reserve Bank of St. Louis President James Bullard said to expect more uncertainty when the Federal Open Market Committee meets next year to decide whether to raise or maintain target interest rates.

"We are going to return to an era where there is a bit more uncertainty about what the committee is going to do, meeting to meeting," he said to reporters after a speech in Fort Smith on Friday.

Changes in the federal funds rate are the Fed's primary lever for influencing the economy. The benchmark rate directly influences other short-term rates, such as credit card rates.

But the Fed's larger influence on the economy flows from its monetary policy's effects on long-term borrowing costs, including rates on mortgages and corporate debt. Those interest rates affect the prices of stocks, bonds, real estate and other assets.

The committee meets eight times a year, about every six weeks. Bullard does not have a vote in deciding economic policy.

Most Reserve Bank presidents -- except the president of Federal Reserve Bank of New York, who has a vote every year -- serve one-year voting terms on a rotating basis. Bullard, whose district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee, will be a voting member of the committee in 2016.

About seven years ago as the country slid into a recession, the Fed set its benchmark interest rates close to zero to try and strengthen the economy. Since then, benchmark interest rates have hovered between zero and one-quarter percent.

This year has marked a change in the behavior of the Fed. Fed members have discussed raising benchmark interest rates during their December meeting.

Bullard said the Fed should avoid the policy that led to a tightening cycle, where the Fed raises short-term interest rates to curb spending and slow inflation, from 2004 to 2006. For 17 meetings in a row during that time, the Fed raised rates.

"I'm virtually certain that was not optimal monetary policy," he said. "That was a very mechanical approach to increasing rates."

Bullard said he expects the economy to continue improving if nothing unusual changes, because U.S. labor markets have largely normalized and financial stress in the country is not as high as the past five years. He said job growth will slow as the economy and job market even out.

"The unemployment rate, at 5 percent in October, is within the committee's central tendency of the estimate of the longer-run rate," he said.

Bullard said he wants the Fed to change its economic policy if the economy slows or strengthens.

"I am hopeful we can be more flexible and reactive to data," he said.

Business on 11/21/2015

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