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Bullard: Don’t Assume FOMC Will Cut Again

St Louis Federal Reserve Bank president James Bullard Wednesday cautioned markets not to assume that the Fed’s policymaking Federal Open Market Committee will cut interest rates again at its March 17-18 meeting.

Bullard did not rule out another cut in the federal funds rate on March 18 in a telephone conference with reporters, but doubted the FOMC will have enough new information to move again so soon after its 50 basis point cut of March 3.

Bullard emphasised, however, that the Fed is in a “very fluid situation”, that it has “a lot of flexibility” and that it is prepared to move again to boost the economy.

He defended the Fed’s rate cut, maintaining that it can help the economy, even though it cannot directly address the supply and demand problems presented by the coronavirus.

Explaining why the FOMC moved Tuesday instead of waiting until its regularly scheduled meeting, Bullard said, “It just became clear as the days went by that the Fed was going to end up making a rate cut at the March meeting, and so the thought was, at least for me, why don’t we pull that up and just do it now, as opposed to waiting all the way until the meeting.”

Bullard added that, “It continues to be a volatile environment, and we continue to be cognisant of how the virus is evolving and how this is affecting the economy.”

We’re tracking it day by day,” he said.

Financial markets are placing high odds of another funds rate cut of at least 25 basis points to a range of 0.75% to 1% on March 18, but Bullard issued a caveat when asked whether the FOMC will feel forced to do as the market expects.

“It continues to be a very fluid situation, and I don’t want to pre-judge what happens at the March meeting, because we don’t know exactly what data will have in hand at that point,” he said.

“We do have a jobs reports coming out here, and we’ll have some daily data on public health responses,” he continued, but “I think the problem for a March move at that meeting is that the Committee just met, and the Committee made a judgment what the policy rate should be…”

“Just looking at how the committee has behaved in the past, you would have to be able to make a judgment about what data are you citing, or else why didn’t you go 75 at the previous meeting when you just met,” he went on.

“So I think the way to think about this is that the Committee looked at it; we made the best judgment we could, based on the data in hand at the time,” he said. “We understand that the situation is fluid, but we’re not going to have a lot of information that is new at the time of the meeting which is not very far away. So I think that’s the way to frame this.”

Bullard added, “I’m not saying we can’t do anything, but I’m saying I don’t want markets to over focus on that meeting because just the logic of how this proceeds, we’re not going to have very much new information at that point.”

He held the door wide open to further Fed easing at some point.

“Now, getting beyond that (March) meeting, then more new information will flow in,” he said. “We’ve already shown we’re willing to move on an inter-meeting basis if it’s a very volatile situation, and we have other meetings scheduled beyond that. So we have plenty of flexibility I think as we go forward here.”

Bullard reiterated that the Fed is “just taking it one day at a time” and said “I don’t think anything’s off the table. We’re ready to move if we think it’s appropriate.”

Asked what the Fed hopes to accomplish with its aggressive rate cutting, Bullard said the Fed’s actions are just part of a “big blanket” of actions by public health and other authorities to combat the coronavirus.

He conceded rate cuts can’t directly offset plant closures and other blows to the supply and demand sides of the global economy, but defended the Fed’s actions nonetheless.

“We’re very cognisant that we’re not going to change the medical situation, but on the margin I would say that lower interest rates are going to stimulate investment and some consumption in the same way they always would…”

He noted that people can buy a car at lower rates without even leaving home, and added, “You might also have a corporate board that might look at lower rates and say this is the time to fund their big investment even though they’re in the middle of a crisis in terms of public health because that big billion dollar project might get implemented over the next two or three years.”

“So I think there are ways lower rates would affect the economy even though you can’t change molecular structure of the virus,” he added.

Asked how quickly the Fed should take back some of its cumulative 125 basis points of rate cuts made since last July once the viral crisis has passed, Bullard suggested he would be in no hurry.

“We are trying to get inflation higher, so we’re looking for that as well,” he noted.

At the March meeting, Bullard and his colleagues will be releasing revised economic forecasts and rate projections or “dots”, and he acknowledged that will be a challenge.

“There’s so much uncertainty about what the true effects of the virus will be that we’re going to have to put very wide confidence bands around those anyway,” he said.

The “dots” are for year-end, he pointed out.

Steven K. Beckner

Julie Ros

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