St. Louis Fed President James Bullard says the central bank faced an uphill battle by choosing to raise rates by 25 basis points in December.
In an exclusive interview with Yahoo Finance, Bullard said the Fed may have mixed the markets up by saying that it would raise rates while simultaneously signaling a slowing economy in 2019. Bullard added that the so-called “dovish rate hike” was also tough to read as the Fed left the possibility of future rate hikes on the table.
“It’s that confluence of actions that made this confusing to markets and caused a lot of turmoil,” Bullard said.
Bullard disagreed with the December decision to raise rates by 25 basis points, advocating for a pause while the Fed received more data. Ahead of that meeting, tumbling markets and gloomier expectations for 2019 had some hoping that the Fed would not implement the fourth rate hike of the year, as its dot plots had suggested.
The decision to raise rates by 25 basis points was unanimous; Bullard was not a voting member of the Federal Open Market Committee in December. Even though he disagreed with the decision, Bullard said the Fed did the best it could to communicate its “dovish rate hike.”
“There was no way to sugar coat that, I don’t think,” Bullard said.
Bullard has rotated in as a voting member of this year’s committee.
Current policy ‘on an even keel’
Bullard told Yahoo Finance Wednesday that he is pleased with the committee’s current stance of signaling no rate hikes for 2019, saying that he is watching inflation particularly closely.
“The Fed came down and adopted my suggested policy of a flat rate outlook so I think all of that is combining to keep us on an even keel,” Bullard said.
In recent months, Fed Chairman Jerome Powell has described inflationary pressures as “muted.” Readings of core personal consumption expenditures have drifted below the Fed’s 2% inflation target, raising questions about whether or not the Fed faces a credibility issue in achieving its price stability mandate.
Bullard said he is advocating for replacing the current inflation targeting strategy with a new approach that prioritizes the nominal level of GDP. In short, the strategy would allow the Fed to target prices by allowing inflation to rise when economic growth is low but pushing inflation down when growth is high.
The Fed is reviewing its monetary tools and communications practices this year.
Still, Bullard said he expects the U.S. economy to grow at an annual rate of 2% for the second quarter.
“Overall, the outlook is still looking very stable for the U.S. economy. I expect better news to come in as we go through the second quarter,” Bullard said.
That commentary was backed up by Philadelphia Fed President Patrick Harker in a speech in New Jersey on Wednesday. Harkers said he sees the economy growing “a bit above” 2% for 2019, adding that portions of an inverting yield curve support a “wait-and-see mode.” Harker had a more optimistic view on inflation, saying he sees inflation averaging “slightly higher than 2%” in 2019 and 2020.
Harker said he sees, at most, one rate hike for 2019.
Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.