By Greg Robb
St. Louis Federal Reserve President James Bullard on Thursday defended the central bank from charges its aggressive interest rate-hike policy is creating impossible conditions for foreign central banks by saying there were no surprises this year compared to other tightening cycles.
“In the earlier era, the quantitative easing era, foreign central banks said they were surprised by Fed action and they were not sure what our policy was and this was feeding back to them,” Bullard said, in a livestreamed discussion sponsored by HSBC.
“But here, I think we’ve made it clear and we’ve been forthright,” Bullard said.
This allowed foreign central banks to act in tandem and calibrate their policies, Bullard said.
“This has helped us a lot this year to limit the sorts of disorderly adjustment that might otherwise occur,” he added.
Some analysts have said the developments in the UK this week was a sign of concern about global financial stability.
The Bank of England was forced to restart bond buying Wednesday to easing financial market jitters even though it runs counter to their efforts to fight inflation.
The St. Louis Fed president said that the Fed was always monitoring financial stability risks.
“So far, so good,” he concluded.
Pressed by reporters after his talk, Bullard said there are daily briefings at the U.S. central bank about financial stability.
Bullard noted that news reports indicate some of the volatility in the UK bond market this week was tied to pension funds using derivatives that were sensitive to large movements in bond prices.
“So I would say it is up to pension funds to take that risk into account with their trading strategy and I’m sure they will now,” he said.
“For all other parts and corners of the financial markets, they have to be careful and need to examine their strategies to make sure they are not susceptible to large movements in yields because yield are on the move, both in the U.S. and globally, and that’s because inflation has come back on the scene,” he said.
The current UK turmoil was about the kind of economic policy they want.
“I don’t see this really impinging on U.S. inflation or real growth developments,” he said.
Bullard said some of the consumer inflation reports have been a shock and surprise to central banks this year.
“I think inflation will start to come down in 2023,” Bullard said. But exactly how fast that happens and whether there are more surprises are open questions.
“It’s a fact of life, I’m afraid, in the central banking world,” Bullard said.
U.S. stocks /zigman2/quotes/210598065/realtime DJIA +0.10% /zigman2/quotes/210599714/realtime SPX -0.12% were sharply lower on Thursday while the yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +1.30% rose above 3.8% after tumbling in the prior session on the BOE moves.