Federal Reserve Bank of St. Louis President James Bullard said the central bank may need to ease monetary policy further to offset downside risks from trade conflicts and too-low inflation.
“A sharper-than-expected slowdown may make it more difficult for the Federal Open Market Committee to achieve its 2% inflation target,” Bullard said in remarks prepared for delivery Monday in Illinois. “The FOMC may choose to provide additional accommodation going forward, but decisions will be made on a meeting-by-meeting basis.”
A divided Fed cut interest rates for the second time in two months last week, reducing its federal funds target by a quarter percentage point to a range of 1.75% to 2%. Bullard dissented from the decision, favoring a half-point reduction, while two other regional chiefs wanted no change. Inflation has been below the Fed’s target for most of the past seven years.
The recent inversion of U.S. Treasury yields, with higher short-term rates than long-term ones, “seems to suggest U.S. monetary policy may be too restrictive for the current environment,” Bullard told the Effingham County Chamber of Commerce.
Downside risks to the 10-year-old U.S. expansion include global trade policy uncertainty, slowing global growth, contraction in global and U.S. manufacturing, and slowing business investment, Bullard said.
“Trade policy uncertainty creates a disincentive for global investment” and “slower global growth may feed back into slower growth in the U.S.,” he said.
Market measures of inflation expectations have slumped since mid-July amid increased concern about trade conflicts.
“Insurance rate cuts may help re-center inflation and inflation expectations at the 2% target sooner than otherwise,” he said.
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