Fed official: end reinvestment

President and chief executive of the Federal Reserve Bank of St. Louis, James ‘Jim’ Bullard, has told a gathering of Melbourne’s business elite that he is more inclined to let the central bank’s massive bond-buying program run off in 2017 than rush to hike interest rates.

He also noted the United States is “a closed market when compared with Australia and other countries” and its financial leaders do not track global events to the extent that more open economies do.

Bullard illustrated his point by arguing the recent US air strike on Syria would have little impact on the US economy nor on the Federal Reserve’s macroeconomic outlook for 2017.

He made the comments during a presentation on his views on current US economic and monetary policy at an event hosted by the Australian Centre for Financial Studies (Monash Business School) in Melbourne on Monday, April 10, 2017.

Bullard sits on the Federal Reserve’s federal open market committee (FOMC), which meets eight times each year to set the direction of US monetary policy.

Key to productivity still out of reach

His presentation played down the likelihood of a hike in global interest rates for investors or people living on fixed incomes. Bullard warned faster productivity was the key to gross domestic product growth and was the only sure way for the US and global economies to expand. But “no one seems to have the answers as to why productivity [is] so low”, and no one seems to have the solution to the problem either.

“There is no shortage of ideas but no good answers,” he said. Until someone comes up with the answers, the US and the global economy are stuck with very low interest rates, he added.

Bullard’s speech also focused on the US’s current low real GDP growth and low real interest rates.

“Real GDP has been growing about 2 per cent, inflation is near the Fed’s 2 per cent target and the unemployment rate has been slowing,” he said. The first-quarter 2017 figures show GDP growth was below 2 per cent and hard data suggested that “things don’t look good”.

“The US policy rate can remain relatively low and still keep employment and inflation targets,” he said.

Although post-Trump fiscal policies for regulation, infrastructure and tax reform could have an impact on growth, Bullard said the Fed would wait and see how these policies developed. He added that if growth or inflation started to pick up, then the Fed could start raising official rates.

Bullard dissented from many of his colleagues on the Fed Reserve Board over its bond-buying program. Instead of going for another rate rise or two this year, he said now might be a good time for the FOMC to consider allowing the balance sheet to normalise by ending reinvestment.

“The Federal Reserve can reduce its $4.5 trillion balance sheet by ending reinvestment in the good times,” he argued. “Just let stuff mature and not replace it. It would not be a major issue for global markets. It would allow for a more natural adjustment.”