The base case of Federal Reserve officials for gradual but steady rate hikes over the next few years is misguided, said St. Louis Fed President James Bullard on Friday.
“It’s okay to raise rates a little bit but I don’t think we need a major adjustment at this juncture in order to stay on track and keep inflation near target,” Bullard said in an interview on Bloomberg Television.
“This is not an environment where the data is screaming at the Fed that you have to move,” Bullard said.
Bullard last month said he only forecasts one interest rate hike this year and none in 2018 and 2019. That puts him at the low end of the so-called dot plot.
The median forecast of the dot plot is for two more rate hikes this year, three more in 2018 and three more in 2019, bringing the short-term rate to 3%.
Bullard said he would not oppose one more rate hike this year but said that might be all.
“We don’t think you need to have a 200 point basis point adjustment in interest rate in this type of environment,” he said.
Bullard downplayed the fact that inflation hit the Fed’s target for the first time in nearly five years.
“Inflation is at target, but it is not expected to move very far from target,” and was not “threatening 3%,” he said.
“If we felt like inflation was creeping up and it might get away from us, ok, that’s an environment where you say I might want to get ahead of that process. But we’re not in that environment,” he said.
He dismissed the argument by many Fed officials that the central bank should move rates up gradually but steadily to avoid having to push rates up quickly further down the road.
In an interview with MarketWatch on Thursday, Dallas Fed President Rob Kaplan made this point, saying he wanted to avoid having to raise rates in a hurry as that might cause a recession.
Bullard said Fed policy was not in “overkill” at the moment, but could get there.
“If you go forward with a whole lot of rate hikes without the data really perking up more than it has, I would call that into question,” he said.
The St. Louis Fed president said the economy is in the same slow-growth mode in place since 2015. He noted first quarter GDP tracking estimates have sunk to a 0.9% annual rate in the first three months of the year.
“Where’s the boom,” he asked.
New York Fed President William Dudley said earlier Friday that two more rate hikes this year “seems reasonable.”
Bullard repeated that he is favor of starting to shrink the Fed’s $4.5 trillion balance sheet.
He said the Fed should not “race” to put policy in place ahead of the end of Fed chief Janet Yellen’s four-year term next February.
“You want to have a lot of continuity in policy. The FOMC is a big committee. Even if you swap out some people….they are one voice among 17,” he said.