By Jeffry Bartash, MarketWatch
A top Federal Reserve official said Monday the central bank might have to cut interest rates soon because of low inflation and the threat to the economy from President Donald Trump’s festering trade fights with China and other countries.
James Bullard, president of the St. Louis Fed, said the resolution of trade conflicts is likely to be more difficult than previously believed, a development that could chill business investment and add pressure on a U.S. economy whose growth has already waned since last year.
The Fed “faces an economy that is expected to grow more slowly going forward, with some risk that the slowdown could be sharper than expected due to ongoing global trade regime uncertainty,” Bullard said in a speech in Chicago .
A batch of recent reports point to a slower economy, including the latest snapshot on manufacturing conditions in the United States. The U.S. stock market /zigman2/quotes/210598065/realtime DJIA +1.85% /zigman2/quotes/210599714/realtime SPX +1.95% has also taken a beating in the past few weeks after trade tensions soared.
Last month, Trump urged the Fed to cut rates to help the U.S. in its trade fight with China. Bullard did not mention the president and cautioned that the Fed can’t react to the weekly give-and-take in trade negotiations.
Aside from the trade disputes, Bullard said the case for a rate cut was also strengthened by persistently low inflation below the Fed’s 2% target. He contended that a recent inversion in the Treasury yield curve suggests the current level of interest rates is “inappropriately high.”
Bullard is a voting member on the Fed’s interest-rate-setting board this year. He has frequently argued for keeping the cost of borrowing low, saying the Fed risked hurting the economy by being too aggressive.
The bank’s benchmark interest rate, known as fed funds, was last raised in December and sits at a range of 2.25% to 2.50%.
Even that’s too high, Bullard said.
“Financial markets appear to expect less growth and less inflation going forward than the [Fed] does, a signal that the policy-rate setting may be too restrictive for the current environment,” he said.
The St. Louis Fed president said a rate cut or cuts could help stabilize the economy and ensure the current 10-year-old economic expansion is extended.
He recounted that the Fed reversed course in the mid-1990s, trimming rates after a series of increases when it appeared the expansion was about to run out of steam. Instead the economy grew for another five years.
“The economy did not enter a recession but instead boomed during the second half of the 1990s,” Bullard said. “This example shows that policy rate normalization can be accomplished without damaging the prospects for an extended period of growth.”