Another US interest rate hike may not be far off, Fed's Bullard says

The US central bank’s decision not to move on interest rates in March was not inconsistent with the guidance provided by rate-setters when they met in December; indeed, a further tightening in policy might not be far off, a top official said.

“Certainly, a case could be made that as of March the economy had progressed about as had been expected in December,” the president of the Federal Reserve bank of St.Louis, James Bullard, said.

“The relatively minor downgrades contained in the March SEP suggest that the next rate increase may not be far off provided that the economy evolves as expected,” he added, according to a summary of his remarks provided by the St.Louis Fed.

His remarks followed a presentation to the New York Association for Business Economics on the subject of the so-called ‘time-inconsistency’ of the Fed’s monetary policy decisions.

Critically, at the December 2015 FOMC meeting rate-setters had pointed to the possibility of up to four additional interest rate hikes in 2016.

According to Bullard, when they met in March policy-makers at the Fed had considered three additional variables on top of those which were analysed as part of their regular Summary of Economic Projections.

Those were: the St.Louis Fed’s Financial Stress Index, the outlook for real global GDP growth as estimated in the IMF’s World Economic Outlook and TIPS-based measures of inflation expectations.

For Bullard, the Fed appeared to have put more weight on the downgrade to US and global growth forecasts than to an upgraded view of the US labour market.

Following their 15-16 March FOMC meeting, some pundits had suggested the Fed was willing to tolerate an ‘overshoot’ in consumer price inflation, something which Fed chair Janet Yellen explicitly denied at the press-conference following that meeting.

In the days after the Fed’s decision to stay on hold some market commentary had also highlighted how Fed funds futures had moved to price-in a lower probability of further tightening in the year ahead, instead of the opposite as one might perhaps have expected.

Nonetheless, recent more ‘hawkish’ remarks from several Fed officials had led markets to again price-in greater odds of a hike.

To take note of however, on 16 March Yellen explicitly pointed out that the interest rate projections submitted by the Fed’s rate-setters were not meant to be taken as committing the Fed to any specific course of action.